Key indicators

Primus Equity Fund

Trillium Equity Fund

5-year Annualized Return

10.84%

13.18%

Quartile Rankings

2

1

Volatility

Low to Medium

Medium

Management Expense Ratio (MER)

2.39%

2.60%

Portfolio Manager Start Date

September 1987

March 1990

Sharpe Ratio

0.37

0.87

1

To whom are you permitted to make an unsolicited telephone call to market new products (“cold-call”) if they have signed up on the National Do Not Call List (DNCL)?

Correct

The correct answer: someone with whom you already have a business relationship

Your answer: someone with whom you already have a business relationship

Solution: If someone is on the DNCL, you are not permitted to make unsolicited calls for telemarketing purposes unless you already have a business relationship with them. If they are already your client, they would expect to hear from you from time to time regarding investment advice, changing market conditions, or even due to regulatory requirements, depending on the nature of the relationship. Past clients are no longer your clients so you do not have a business relationship with them.

2

Which of the following statements about Mutual Fund Dealers Association of Canada (MFDA) is CORRECT?

Correct

The correct answer: It is a self-regulatory organization for the distribution side of the Canadian mutual funds industry.

Your answer: It is a self-regulatory organization for the distribution side of the Canadian mutual funds industry.

Solution: The MFDA is the self-regulatory organization for the distribution side of the Canadian mutual funds industry (i.e. mutual fund dealers and dealing representatives). All mutual fund dealers outside the province of Québec are required to be members of the MFDA. Dealing representatives are registered directly with the provincial or territorial regulatory authority not the MFDA.

3

What is the role of the Ombudsman for Banking and Investments (OBSI)?

Correct

The correct answer: OBSI helps resolve disputes between participating banking services and investment firms and their clients.

Your answer: OBSI helps resolve disputes between participating banking services and investment firms and their clients.

Solution: OBSI serves as an alternative to civil litigation providing dispute resolution services to its members and their clients. It is not a regulator, nor does it offer coverage in the event of insolvency.

4

Jeff Thomson is a newly licensed dealing representative. He has received a cash deposit of $12,000 and would like you to guide him as to whether he is required to report the transaction to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). What is the minimum dollar amount of a cash deposit that Jeff is required to report to FINTRAC?

Correct

The correct answer: $10,000

Your answer: $10,000

Solution: According to FINTRAC guidelines, Jeff is required to report large cash transactions of $10,000 or more. In addition to large cash transactions, Jeff is also required to report any suspicious completed or attempted transactions.

5

Which of the following dealing representatives is in a conflict of interest situation?

Correct

The correct answer: Jonathan, who recommends mutual funds to his clients based on which funds pay the highest commission.

Your answer: Jonathan, who recommends mutual funds to his clients based on which funds pay the highest commission.

Solution: Under no circumstances should Jonathan put his interests or the interests of his mutual fund dealer ahead of the client’s interests. Jonathan is in a conflict of interest situation. Thomas has obtained written permission from his employer and is serving in an honorary capacity with a food bank that has no business dealings with his dealer firm. Eric’s wife works for a competitor firm and he is not in any conflict of interest as long as confidentiality is maintained. All provinces have regulations that allow life insurance agents to sell mutual funds if they are also registered as mutual fund dealing representatives. Sabrina is not in conflict of interest.

6

Which of the following statements regarding ethical conduct is true?

Correct

The correct answer: Ethical conduct means conforming to approved standards.

Your answer: Ethical conduct means conforming to approved standards.

Solution: Ethics defines the standards of conduct to which you and members of your group are expected to adhere. Ethical conduct means confirming to those approved standards, which in turn safeguards client interests and maintains the integrity of the firm.

7

The Mutual Fund Dealers Association of Canada (MFDA) has several rules dealing with different aspects of the mutual fund business. Conduct Rule 2 offers details on how both you and your employer are to carry out business. Which of the following is covered in Rule 2?

Correct

The correct answer: standard of conduct for ethical behaviour

Your answer: standard of conduct for ethical behaviour

Solution: Rule 2 contains rules on business conduct. Rule 2.1.1 outlines a standard of conduct for ethical behaviour of dealing representatives including:

Deal fairly, honestly and in good faith with clients.

Observe high ethical standards and conduct in business dealings.

Refrain from engaging in unbecoming business conduct and practices.

Do anything that is detrimental to the public interest.

National Instrument 81-102 (NI 81-102) provides rules on standard fund performance data. Mutual fund prospectus disclosure rules are stated in NI 81-101. Registration rules for registration of firms and individuals with the provincial or territorial securities commissions are contained in NI 31-103.

8

Josephine is a newly registered dealing representative. Which of the following actions constitute proper conduct expected of her?

Correct

The correct answer: Protecting the confidentiality of client information.

Your answer: Protecting the confidentiality of client information.

Solution: Dealing representatives are required to disclose any conflicts of interest before processing the transaction. They are required to clearly distinguish facts from comments when making recommendations. Dealing representatives have an obligation to understand their clients' current situations before making suitable recommendations. Dealing representatives are obliged to protect the confidentiality of client information at all times.

9

Which statement about the registration process is TRUE?

Correct

The correct answer: Objections to your registration may be due to unacceptable past employment history in the securities industry.

Your answer: Objections to your registration may be due to unacceptable past employment history in the securities industry.

Solution: Objections to your registration may be due to unacceptable past employment history in the securities industry, or from a criminal record in which the crime involved integrity or conduct. The advantage of NRD is that an applicant needs to file only one application for registration in more than one jurisdiction, through the passport system. Under NI 31-103, there is no renewal requirement for registration in any jurisdiction. Registration remains effective until it is suspended or terminated. If you leave your employer, your registration is suspended pending notification of the appropriate securities regulatory authority. You can, however, have your registration reinstated should you join another firm. Generally, you cannot begin to sell mutual funds or provide advice until your registration has been reinstated through your new employer and you receive written confirmation of this from the securities regulatory authority.

10

Which of the following statements is TRUE?

Correct

The correct answer: All unethical actions are breaches of the standard of conduct.

Your answer: All unethical actions are breaches of the standard of conduct.

Solution: An act may be unethical but not necessarily a regulatory breach. Not all unethical actions are punishable, nor must all unethical actions be reported to the MFDA. All unethical actions are breaches of the standard of conduct to which dealing representatives are expected to adhere.

11

Under  Mutual Fund Dealers Association of Canada (MFDA) Rules you have the duty to disclose which of the following?

Correct

The correct answer: outside business activities

Your answer: outside business activities

Solution: Under MFDA Rules you are required to disclose the following:

conflicts of interest

referral arrangements

dual occupation

leveraging risks

outside business activities

complaint procedures

You have a duty to keep your skills and knowledge up-to-date but there is no MFDA requirement to disclose how you do it to your client. Similarly, there is no MFDA requirement to disclose your educational background.

12

Sarah, a mutual fund dealing representative, was reviewing the features and characteristics of an emerging markets mutual fund that she was considering for a client. Based on her client's objectives and risk profile, Sarah thought it would be a suitable investment. If Sarah makes the following statements, in which instance would she be following best practices as a mutual funds dealing representative?

Correct

The correct answer: "The prospectus indicates that this is a speculative fund that is suitable for investors with a growth objective and a high risk tolerance."

Your answer: "The prospectus indicates that this is a speculative fund that is suitable for investors with a growth objective and a high risk tolerance."

Solution: In statement B, she is simply quoting information provided in the prospectus which is a permissible practice. All other statements are examples of non-permissible practices.

13

Today is Sheldon’s first day as a dealing representative. He is in the process of opening an account for his client. He is not sure of how to furnish the relationship disclosures to his first client. How should Sheldon provide the relationship disclosures required under the Client Relationship Model (CRM)?

Correct

The correct answer: Disclosures should be provided in writing to the client on the account opening form or on a separate form.

Your answer: Disclosures should be provided in writing to the client on the account opening form or on a separate form.

Solution: Disclosures can be provided in writing on the account opening form or on a separate form. There is no prescribed format but the disclosures must be in written plain language.

14

Your clients , Ravi and Nuzah Patel, both 30 years of age, recently married. Ravi earns an annual salary of $55,000 as an X-ray technician. Nuzah earns $72,000 per year as a pharmacist. They are currently viewing houses in the $200,000-to-$225,000 price range and hope to purchase a house within the next year. They plan to use their wedding gifts of cash totalling $12,000 as a down payment. What is the Patels' investment objective for the $12,000 in cash?

Correct

The correct answer: capital preservation

Your answer: capital preservation

Solution: The Patels plan to use the $12,000 in cash as a down payment for a home within the next year. They want to ensure that the money is available when they need it. Therefore, their investment objective for this cash is capital preservation.

15

Gilles and Marielle Lachette, both 59, are the lucky winners of the latest home lottery sponsored by their local children's hospital. The Lachettes sold their prize and received $500,000 in cash after transaction costs. They have decided to use this money to retire early within two years. Since the money will be used to supplement their retirement, they do not want to take on unnecessary risk. Gilles is a city bus driver earning $49,000. Marielle works as a bookkeeper, earning $35,000 annually. The Lachettes have paid down the mortgage on their home, which is now worth $200,000. Their two children, now grown, have good jobs and are financially independent. The only financial asset they own is an RRSP in Marielle's name worth $78,000. The RRSP holds five guaranteed investment certificates (GICs) with maturities between one to five years. Given that the Lachettes have no investment knowledge or experience, they request your advice.
Based on the information provided, what is the Lachettes' risk tolerance?

Correct

The correct answer: low tolerance for risk

Your answer: low tolerance for risk

Solution: The Lachettes have no investment experience or knowledge. Their current investments are in GICs. They have a short time horizon and require an income from this money. They mention that they do not want to take on unnecessary risks. They have a low tolerance for risk.

16

Diego, a mutual fund dealing representative, is reviewing his notes from a recent client meeting. His client, Linda, wants to retire next year with an annual pre-tax income of $50,000. However, she does not have the financial resources necessary to do so. Before his next meeting with Linda, Diego prepares several scenarios for her to review. The first scenario requires Linda  to delay her retirement for another five years. The second scenario requires Linda to accept a pre-tax income of $45,000 per year. The third scenario requires Linda to take greater investment risk with her portfolio. Diego will discuss these scenarios with Linda to determine which one is appropriate. Where are Diego and Linda in the strategic investment planning process?

Correct

The correct answer: clarify client status, problems and opportunities

Your answer: clarify client status, problems and opportunities

Solution: Diego is currently in the process of clarifying Linda's present status and identifying problems and opportunities. He has already identified a problem with her financial resources. Before moving onto the next step, Diego must discuss with Linda a new objective that is realistic and attainable. Once they have a reasonable objective in mind, they can move on and develop a feasible strategic investment plan.

17

Which of the  following statements regarding the suitability process is true?

Correct

The correct answer: Suitability is a cyclical multi-step process.

Your answer: Suitability is a cyclical multi-step process.

Solution: It is obligatory for dealing representatives and clients to get the suitability process completed. Merely giving the written disclosures are not sufficient and dealing representatives are obliged to enter into a dialogue with their clients to get detailed information. The process and review has to be done for all clients irrespective of the type of investments in the portfolio.

18

One of your clients, Rahman, is a retired senior citizen with a conservative portfolio of around $750,000. He is always on the lookout for investments that can offer him a better yield to supplement his income. In his quest for a higher yield, he comes to your office and asks you to liquidate half of his portfolio and invest the proceeds in a start-up mining company. The proposed trade is entirely unsuitable based on Rahman’s know your client (KYC) information. What is the most appropriate action you should take?

Correct

The correct answer: Clear the transaction with your Compliance Department or Branch Manager.

Your answer: Clear the transaction with your Compliance Department or Branch Manager.

Solution: It is essential to handle unsolicited trades with caution. If you refuse to accept a trade due to suitability concerns and the investment increases in value, the client is most likely to complain and claim compensation. If you accept the trade without question and the client loses money on that investment, he may then claim compensation that the dealing representative should not have accepted the trade if it was unsuitable. You are required to assess all orders for suitability. Whether a purchase order is to be accepted or not, the procedure for acceptance or refusal is usually contained in the Policy and Procedures Manual (PPM). You should clear the transaction with your Compliance Department or Branch Manager.

19

As a mutual fund dealing representative, what is your area of responsibility with regard to product knowledge?

Correct

The correct answer: You are required to have detailed knowledge of any product you sell in order to be able to assess the suitability of the product.

Your answer: You are required to have detailed knowledge of any product you sell in order to be able to assess the suitability of the product.

Solution: You are required to have a detailed knowledge of the product you are recommending to the client. It is your responsibility to have a strong knowledge of the basic components of a fund facts document and what information these components provide to the client. Dealer firms have approved lists of mutual funds and/or mutual fund companies from which the mutual fund dealing representative has to choose. Your clients expect you to have information available that will help them make decisions for their financial future.

20

Why is the Know Your Client rule the single most important rule you must remember when selling securities?

Correct

The correct answer: By asking a series of questions, both you and the investor can be assured that the investment recommendations made are appropriate for the investor.

Your answer: By asking a series of questions, both you and the investor can be assured that the investment recommendations made are appropriate for the investor.

Solution: As a dealing representative, you have a regulatory obligation to ensure that every client transaction is suitable for your client. The process of assessing suitability involves matching the characteristics of the proposed investment with the investor’s stated needs as documented in the Know Your Client (KYC) information. With all the relevant information in hand, you will be able to formulate a mix of investments and services that suit your client.

21

Your client  approaches you with some literature he has received on a mutual fund. You are not familiar with the mutual fund, but it is similar to a family of mutual funds you sell. The client has read the sales brochure and the simplified prospectus and is also excited about the mutual fund’s past performance. He wants your recommendation on this mutual fund. You know already from his know your client (KYC) information on file that your client is comfortable with risk. Which of the following statements is TRUE?

Correct

The correct answer: You may not recommend the trade because you do not know enough about the mutual fund to satisfy the know your product (KYP) requirement.

Your answer: You may not recommend the trade because you do not know enough about the mutual fund to satisfy the know your product (KYP) requirement.

Solution: You may not recommend the trade because you do not know enough about the mutual fund to satisfy the KYP requirement. You are responsible for performing sufficient due diligence on a product before you can recommend it to a client. Otherwise, you are unable to make an assessment of its suitability for your client. Due diligence on your part is still required even if the client has already done some of his own. You are not permitted to simply rely on the representations of the issuer, or its similarity to another issuer’s product, or that other firms are already offering the product. Trades initiated by clients are permitted provided a suitability assessment is made.

22

You have analyzed the situation of a client and concluded that he would benefit from using leverage. What should you do when recommending leverage to the client?

Correct

The correct answer: Inform the client about the risks, and deliver the risk disclosure documents.

Your answer: Inform the client about the risks, and deliver the risk disclosure documents.

Solution: You are required to inform the client about the potential risks and deliver the prescribed risk disclosure document to the client. Leveraging can magnify losses for the client and he or she will still be responsible for repaying the loan with interest whether or not the investment performs.

23

What are users of capital in the financial markets called?

Correct

The correct answer: borrowers

Your answer: borrowers

Solution: Users of capital are called borrowers and providers of capital are called lenders.

24

Which phrase best completes the sentence, “The secondary debt market is where…”?

Correct

The correct answer: …dealers bring together buyers and sellers of securities.

Your answer: …dealers bring together buyers and sellers of securities.

Solution: New securities are issued to investors for the first time on the primary market. Subsequent trading of those securities occurs in the secondary markets. Dealers bring together buyers and sellers of securities on the secondary market.

25

Which of the following statements about the supply curve is correct?

Correct

The correct answer: The supply curve indicates the behaviour of sellers and slopes upward to the right.

Your answer: The supply curve indicates the behaviour of sellers and slopes upward to the right.

Solution: The supply curve indicates the behaviour of sellers and is not fixed. It indicates the quantity of goods or services they can supply at various price points. As the name indicates, complementary goods complement another product (e.g. hot dogs and hot dog buns).The availability of a complementary good tends to have a positive impact on the demand of a product. Economies of scale refer to the reduction of the unit cost of a good or service as the scale of a company's output increases. This may be due to factors such as a more efficient production process or decreased labour costs. Market equilibrium refers to the point at which quantity demanded equals quantity supplied.

26

Which of the following items would be included in the calculation of gross domestic product (GDP)?

Correct

The correct answer: windows sold to a homeowner

Your answer: windows sold to a homeowner

Solution: Gross Domestic Product (GDP) is a measure of the sum of the market value of all the final goods and services produced in the economy in a year. By final goods and services we mean goods and services sold to their final users. The homeowner would be the final user of the windows. All the other goods are inputs into the manufacture of final goods.

27

The degree to which investment capital is influenced by changes in financial markets and the overall economy is descriptive of what investment characteristic?

Correct

The correct answer: sensitivity

Your answer: sensitivity

Solution: Investment capital has three related characteristics:

Sensitivity – the degree to which investment capital is influenced by changes in financial markets and the overall economy.

Scarcity – the limited supply of investment capital.

Mobility – the ability of investment capital to move around the globe very quickly.

28

Which of the following is an example of expansionary fiscal policy?

Correct

The correct answer: increasing transfer payments

Your answer: increasing transfer payments

Solution: Fiscal policy is the government's use of taxes, transfer payments and spending to influence the overall level of economic activity. Increasing transfer payments like unemployment benefits is an example of expansionary fiscal policy. Increasing income taxes and decreasing government expenditures represent contracting fiscal policies. Change in the Bank of Canada rate is considered monetary policy. Decreasing the Bank of Canada rate is indicative of using monetary policy to stimulate the economy.

29

How do futures contracts differ from option contracts?

Correct

The correct answer: Delivery of a futures contract is mandatory, while the fulfillment of an option contract is at the discretion of the option buyer.

Your answer: Delivery of a futures contract is mandatory, while the fulfillment of an option contract is at the discretion of the option buyer.

Solution: The types of underlying assets for option and futures trading are expansive. However, the majority of futures contracts are for commodities. Commodities such as wheat, meats, currency, interest rates, and securities are traded in the futures market. Futures and options both have expiry dates. Speculators and hedgers are attracted to all derivative products like futures and options. In a futures contract, both parties are obliged to perform their part of the contract whereas in options the buyer of a contract is not obliged to perform his or her part of the contract except paying the option premium. The buyer can let the option contract expire worthless.

30

Which of the following ranks the money market securities from lowest to highest risk and return?

Correct

The correct answer: T-Bills, Municipal Short-Term Papers, Bankers’ Acceptances, and Commercial Papers

Your answer: T-Bills, Municipal Short-Term Papers, Bankers’ Acceptances, and Commercial Papers

Solution: On a money market securities risk and return spectrum, T-bills guaranteed by the Government of Canada have the lowest risk and offer the lowest returns followed by municipal short-term papers, bankers' acceptances, and commercial papers.

31

Which of the following is a Money Market security?

Correct

The correct answer: Bankers' Acceptances (BAs)

Your answer: Bankers' Acceptances (BAs)

Solution: Money Market securities have terms to maturity of 1 year or less. Bankers' Acceptances (BAs) are issued with maturities of 1 year or less. The other securities are issued with maturities that are greater than 1 year.

32

What types of preferred shares have rights to a share in the company's net profits over and above the specified dividend rate?

Correct

The correct answer: participating preferreds

Your answer: participating preferreds

Solution: Participating preferred shares offer to the holders the ability to participate in the prosperity of the company. Participating preferred shareholders can receive additional dividends over and above the regular dividends in a situation where profits exceed a specified amount.

33

What type of risk is evident with preferred shares?

Correct

The correct answer: They may be redeemed when market conditions are favourable for the issuer.

Your answer: They may be redeemed when market conditions are favourable for the issuer.

Solution: As preferred shares are typically redeemable, there is the added risk that the company will redeem the shares when market conditions are favourable for the company such as in a low interest rate environment. Preferred shares trade on secondary markets similar to their common share counterparts. But their market price tends to be less volatile since they typically have a fixed dividend attached to their offering. Industry analysts typically perform analysis on a company as a whole to determine its risk level notwithstanding its share structure.

34

In January, ABC common shares are trading at $28. Dodi owns 500 shares, which he plans to sell in June to pay for the cost of his daughter's wedding. In order to protect himself against a decline in the share price, Dodi decides to purchase put options that allow him to sell the shares at $30. The premium for the options is $2 and the options expire in June. In June, the stock is trading at $32. Which of the following statements is most applicable?

Correct

The correct answer: Dodi should let his options expire and sell his shares in the market for $32.

Your answer: Dodi should let his options expire and sell his shares in the market for $32.

Solution: As a buyer of a put, Dodi has a right but no obligation to sell the shares. It does not make economic sense to exercise the put option at $30 and sell the shares at $30 when Dodi can sell the shares in the market for $32. Since the stock is trading above $30, Dodi should not exercise his put options, in which case, they will expire worthless.

35

Janine is interested in a short-term investment and is comparing the yields of several products. She is considering a 360-day T-bill that is priced at $97,645. If the face value of the T-bill is $100,000, what is the quoted yield for this T-bill?
quoted yield = (((face value - price)  ÷ price) x (365  ÷  term)) x 100

Correct

The correct answer: 2.45%

Your answer: 2.45%

Solution: The quoted yield for this T-bill is 2.45%, calculated as ((($100,000 - $97,645) ÷ $97,645) x (365 ÷ 360)).

36

When do T-bill investors receive their interest?

Correct

The correct answer: at maturity or redemption

Your answer: at maturity or redemption

Solution: T-bills do not pay a stipulated rate of interest based on their face value. Instead, they are sold at a discount (i.e., less than their face value) and mature at their face value. The interest component is the difference between the purchase price and the price at maturity. If the T-bill is sold before maturity, interest is calculated based upon the quoted yield. Therefore, interest is received at maturity or redemption.

37

Which of the following statements about yield curves is CORRECT?

Correct

The correct answer: A yield curve demonstrates the relationship between bond yield and term to maturity.

Your answer: A yield curve demonstrates the relationship between bond yield and term to maturity.

Solution: The yield curve demonstrates the relationship between yield and term to maturity. A normal or positive yield curve is a yield curve where short-term interest rates are lower than long-term interest rates. This represents the most common scenario. An inverted or negative yield curve occurs when short-term yields are higher than long-term yields. A flat yield curve is one where the short and long term yields are the same.

38

Roger owns shares of Stelco Inc. However, he plans on selling them sometime over the next six to nine months. He is worried the stock price may drop during that time period and wants to limit his potential loss. What is the most appropriate recommendation given Roger's concern?

Correct

The correct answer: Roger should buy put options on the Stelco stock.

Your answer: Roger should buy put options on the Stelco stock.

Solution: Buying put options on the Stelco stock would make sense in Roger's situation. The put option will give him the right, but not the obligation, to sell the stock at a certain price, even if the market price drops below that price, thus limiting his downside loss. If, in fact, the stock price rises, all he has lost is the premium paid for the put option.

39

Doug purchases a $10,000 5-year bond with a coupon rate of 5%. He pays $9,700 for this bond. What is Doug's current yield?

Correct

The correct answer: 5.15%

Your answer: 5.15%

Solution: Doug purchased the bond at a discount of $300 calculated as ($10,000 - $9,700). Although he has paid $9,700 for the bond, he will receive coupon payment of $500 per year calculated as ($10,000 * 5%). His current yield will be higher at 5.15% compared to the bond`s coupon rate of 5%.

40

Which of the following is a benefit of investing in mutual funds?

Correct

The correct answer: ease and convenience of buying and redeeming mutual fund units

Your answer: ease and convenience of buying and redeeming mutual fund units

Solution: Mutual funds do not offer a principal guarantee. However, there are a variety of mutual funds available with differing investment objectives and investors can choose those that offer less risk such as money market funds. Diversification in mutual funds results in reduction of volatility and averaging of return. Redemption proceeds for a majority of mutual funds is on the third business day (T+3 rule). Convenience is one of the benefits of investing in mutual funds.

41

What is the main difference between a closed-end fund and an open-end fund?

Correct

The correct answer: open-end funds continuously issue and redeem units on demand while closed-end funds issue a fixed number of shares

Your answer: open-end funds continuously issue and redeem units on demand while closed-end funds issue a fixed number of shares

Solution: Most open-end funds tend to be quite liquid with investors being able to request redemptions from the investment fund manager (i.e. mutual fund company) on a daily basis. Open-end funds continually issue and redeem units with the number of units fluctuating from day to day. With closed-end funds, they issue a fixed number of shares to the public and those shares are subsequently traded amongst investors on a stock exchange. Since they trade on an exchange, they can be bought and sold throughout the day during the hours of operation of the stock exchange.

42

With closed-end funds, what is the relationship between the net asset value per share (NAVPS) and the market price of the shares?

Correct

The correct answer: The market price is not necessarily equal to the net asset value per share.

Your answer: The market price is not necessarily equal to the net asset value per share.

Solution: The market price of a closed-end fund is not necessarily equal to the net asset value per share. The NAVPS is determined by the value of the underlying assets of the closed-end fund whereas the market price of the units is subject to market conditions and demand and supply. The market price may be higher or lower than the NAVPS.

43

What are the features of a global equity fund?

Correct

The correct answer: long term capital appreciation and significant potential for gains and losses due to currency fluctuations

Your answer: long term capital appreciation and significant potential for gains and losses due to currency fluctuations

Solution: A global equity fund provides the potential for long term capital appreciation from its equity holdings and significant gains and losses from currency fluctuations.

44

Which of the following is a characteristic of exchange-traded funds (ETFs)?

Correct

The correct answer: Lower management fees than comparable mutual funds.

Your answer: Lower management fees than comparable mutual funds.

Solution: ETFs usually trade on a stock exchange. ETFs have low MERs but broker commissions are payable at the time of buying and selling. Investment returns for ETFs tend to lag returns of the indexes they track; this is referred to as the tracking error. There is no full or partial principal protection offered on ETFs.

45

In terms of risk, which one of the following statements is TRUE?

Correct

The correct answer: Real property funds are more volatile than mortgage funds.

Your answer: Real property funds are more volatile than mortgage funds.

Solution: Real property funds, in actuality, are specialty funds. They specialize in real property and because of this fact, can be highly illiquid. These funds are more volatile than mortgage funds, which invest in marketable NHA insured mortgage securities. In general, international equity funds are more volatile than Canadian equity funds because of the added currency risk. Emerging market funds are more volatile than dividend funds. Dividend funds invest in large, established companies with a history of steady dividend payments on their common shares. Emerging markets have additional currency risk, political risk, and business risk. Money market funds are the least volatile of all the mutual funds because they hold a portfolio of short-term fixed income instruments.

46

Mischa has invested in the Halliwell Target Date Fund 2030. The fund invests part of its portfolio in equities and part in fixed income products. The proportion depends on how many years are left until maturity. Which of the following statements is TRUE?

Correct

The correct answer: Target date funds are inappropriate for investors with a short time horizon.

Your answer: Target date funds are inappropriate for investors with a short time horizon.

Solution: Target date funds invest heavily in equities in the early years and gradually rebalance by reducing equity investments and increasing investments in fixed income securities. Investors of the same age do not necessarily have the same investment objectives and risk tolerances. Target date funds may not appeal to investors with a low risk tolerance irrespective of age. They provide no guarantee of principal at maturity. These mutual funds are appropriate for investors that have a time horizon that matches the target date of the mutual fund.

47

How would you respond to a client question regarding strategic asset allocation?

Correct

The correct answer: It is an investor strategy to decide upon an asset allocation and to periodically rebalance the portfolio back to this original asset allocation.

Your answer: It is an investor strategy to decide upon an asset allocation and to periodically rebalance the portfolio back to this original asset allocation.

Solution: With strategic asset allocation, the investor determines the mix of cash, fixed income, and equities that is appropriate for his or her financial situation. From time to time, changes in the market values cause the assets held in the portfolio to deviate from the original asset allocation. When the deviation is significant the portfolio has to be rebalanced to return to the strategic asset allocation.

48

Erna is looking for a mutual fund that can provide her with long-term capital appreciation. She would also like the mutual fund to mimic the investments in the S&P/TSX Composite Index. Which of the following mutual funds would be the most appropriate?

Correct

The correct answer: Latimer Canadian Index Fund

Your answer: Latimer Canadian Index Fund

Solution: The most appropriate fund for Erna would be the Latimer Canadian Index Fund. An index fund matches its portfolio to that of a specific financial market index. Some of the stocks in the index pay dividends that are passed on to the investor, but the primary income expectation of an index fund is capital gains through investment appreciation.

49

Hyacinth is considering moving out of her portfolio consisting of low risk guaranteed investment certificates (GICs) and is reviewing the following four mutual funds as investment possibilities.
What would be the ranking of the following types of mutual funds from the lowest risk and return to the highest risk and return?

Correct

The correct answer: fixed income fund, balanced fund, equity fund, specialty fund

Your answer: fixed income fund, balanced fund, equity fund, specialty fund

Solution: There is a direct relationship between risk and return. More conservative funds typically will have lower risk and lower returns. Of the four funds listed above, fixed income funds will have the lowest risk and the lowest return followed by balanced funds, equity funds, and finally specialty funds being the highest risk and return.

50

Which of the following statements regarding fund of funds (FOFs) is TRUE?

Correct

The correct answer: FOFs offer the professional expertise of a portfolio manager from each mutual fund held in the FOFs.

Your answer: FOFs offer the professional expertise of a portfolio manager from each mutual fund held in the FOFs.

Solution: FOFs employ a multi-manager approach, which means the investor gets the professional expertise of a portfolio manager from each mutual fund held in the fund of funds. FOFs are suited for investors who do not have the time or expertise to customize a portfolio of their own. FOFs are based on pre-set investment portfolios. Investment managers usually offer a series of low risk to high risk managed portfolios. Investors in FOFs are required to bear the management fees of the fund of funds and the management expense fees of the underlying mutual funds.

51

Which of the following would appear on the income statement?

Correct

The correct answer: net profit

Your answer: net profit

Solution: The income statement of a company shows how much revenue a company earned and the expenses it incurred during a specific period. If revenues are greater than expenses, the company shows a net profit. If revenues are less than expenses, the company shows a net loss.

52

What are retained earnings?

Correct

The correct answer: portion of company profits retained by the company after distribution of dividend to shareholders

Your answer: portion of company profits retained by the company after distribution of dividend to shareholders

Solution: Retained earnings are the amount of profits earned by the company and retained within the company after dividends are paid to shareholders. It can be used as a reserve, to finance growth or to repay debt.

53

What type of analysis focuses on studying past trends and patterns in a stock’s price and volume history?

Correct

The correct answer: technical

Your answer: technical

Solution: Technical analysis is a method of evaluating securities based on studying past trends in market activity, prices, and volume. Technical analysts look for patterns or indicators to predict future price movements. Fundamental analysis involves looking at the fundamentals of a company such as revenues, assets, profits, and competitive position. Fundamental analysts attempt to predict the future prospects of a company by becoming intimately acquainted with the details of the company.

54

On August 31, Aishwarya purchases $1,000 of the Conquest European Equity Fund at a net asset value per unit (NAVPU) of $14. On December 15 of the same year, she decides to make another $1,000 purchase at a NAVPU of $12. On December 16, the mutual fund distributes to its unitholders $4 per unit. Aishwarya's distributions are automatically reinvested back into units of the mutual fund. Which of the following statements is CORRECT (please round off to 2 decimal places)?

Correct

The correct answer: After the distribution, Aishwarya owns 232.14 units of the mutual fund.

Your answer: After the distribution, Aishwarya owns 232.14 units of the mutual fund.

Solution: On August 31, Aishwarya purchases 71.43 units, calculated as ($1,000 ÷ $14). On December 15, she purchases an additional 83.33 units, calculated as ($1,000 ÷ $12). Aishwarya now holds 154.76 units (71.43 + 83.33). She receives $619.05 from the distribution, calculated as (154.76 units x $4). The entire distribution is reinvested at the post-distribution NAVPS of $8, calculated as ($12 - $4). The reinvestment of the entire distribution amount yields her an additional 77.38 units, calculated as ($619.05 ÷ $8). After the reinvestment, Aishwarya has a total of 232.14 units, calculated as (154.76 units + 77.38 units).

55

A portfolio manager chooses the securities in the portfolio in an attempt to replicate a benchmark. What type of investment strategy is this?

Correct

The correct answer: passive investing

Your answer: passive investing

Solution: Passive investing is an investment strategy whereby the portfolio manager chooses the securities in a mutual fund according to a chosen benchmark. The goal is to replicate, or track, the return of that benchmark as closely as possible. Technical investing is based on evaluating and investing in securities based on studying past trends in market activity, prices, and volume. Value investing is based on evaluating and investing in good companies that are undervalued. Active investing is based on the idea that through the skill and research of the portfolio manager he or she can find securities that are not properly priced because of market inefficiency.

56

Which of the following statements best describes systemic risk?

Correct

The correct answer: The failure of a large investment bank resulting in bringing about instability of the entire banking system.

Your answer: The failure of a large investment bank resulting in bringing about instability of the entire banking system.

Solution: Systemic risk is the risk that a single event, such as the failure of an institution, can trigger a domino effect and harm other interconnected financial institutions. Eventually, a systemic risk can harm the whole economy. All the other responses are examples of systematic risk, which is also called market risk.

57

Narendra, 20, has recently started working and has invested his entire savings of $5,000 in the ABC Canadian Toronto Stock Exchange / Standard and Poor’s (TSX/S&P) Equity Fund. The mutual fund has a beta of 0.75. What would one expect to happen to the return on the mutual fund if the TSX /S&P Index were to decline by 20%?

Correct

The correct answer: The fund would decline by 15%.

Your answer: The fund would decline by 15%.

Solution: Beta measures the systematic risk of an investment relative to a benchmark index. As the basis of comparison, the benchmark index is assigned the value of one. When the TSX/S&P index declines by 20%, a mutual fund with a beta of 1 would decline similarly by 20%, calculated as (20% x 1). Since ABC has a beta of 0.75, we would expect it to decline 15%, calculated as (20% x 0.75).

58

Which of the following does the Independent Review Committee of a mutual fund have the power to oversee and approve?

Correct

The correct answer: potential conflicts of interests involving the investment fund manager

Your answer: potential conflicts of interests involving the investment fund manager

Solution: The role of an Independent Review Committee (IRC) is to oversee the potential conflicts of interest in decisions involving the investment fund manager.

59

Which of the following statement regarding dollar-cost averaging is TRUE?

Correct

The correct answer: It reduces the risk associated with the timing of a mutual fund investment.

Your answer: It reduces the risk associated with the timing of a mutual fund investment.

Solution: Dollar-cost averaging reduces the risk associated with the timing of a mutual fund investment. It involves investing the same amount of money in the same mutual fund at regular intervals, such as monthly or quarterly.

60

If a mutual  fund has a front-end load of 5%, what is the purchase price per unit paid by the investor if the net asset value per unit (NAVPU) is $10.00 at the time of purchase?

Correct

The correct answer: $10.53

Your answer: $10.53

Solution: The formula for purchase price per unit is ((NAVPU ÷ (1 – front-end sales charge)). The investor's purchase price is $10.53, calculated as ($10.00 ÷ (1 – 5%)).

61

Which of the following expenses is NOT included in the calculation of a mutual fund's management expense ratio (MER)?

Correct

The correct answer: brokerage fees

Your answer: brokerage fees

Solution: The following expenses are included in the calculation of the MER:

management fee, including:

administration of fund operations

portfolio advisory services

marketing and promotion

financing costs

trailer fees

operating expenses, including:

registrar and transfer agency fees

safekeeping and custodial fees

accounting, audit and legal fees

fund valuation costs

costs associated with registered plans

independent review committee fees and expenses

costs of preparing investor communications

regulatory filing fees

bank and interest charges

interest charges and taxes (GST and sales tax)

Brokerage commissions and fees and other portfolio transaction costs are captured in the Trading Expense Ratio (TER).

62

Ted places a redemption order on Tuesday at 7:30 p.m. EST/EDT. The following are the net asset value per unit (NAVPU) figures for the week:

What NAVPU will Ted receive?

Correct

The correct answer: $10.34

Your answer: $10.34

Solution: Since Ted placed the redemption order after 4:00pm EST/EDT on Tuesday, he will not receive the NAVPU for Tuesday. Instead, he will receive the NAVPU for the next valuation day, which is $10.34.

63

Dora  started a registered education savings plan (RESP) for her newborn daughter this year and contributed $3,000 to the plan. Her family income is high enough that she does not qualify for enhanced Canada Education Savings Grant (CESG) payments. How much will Dora receive as CESG?

Correct

The correct answer: $500

Your answer: $500

Solution: The federal government will pay a CESG grant worth 20% of your first $2,500 of contributions to an RESP in a given year. Dora’s daughter is a newborn so she has no CESG carry-forward from previous years. She will receive a CESG grant of $500 for the year, calculated as $2,500 x 20%.

64

Which of the following statements about Voluntary Accumulation Plans is TRUE?

Correct

The correct answer: The investor has the right to change the amount and the frequency of his or her contributions to the plan.

Your answer: The investor has the right to change the amount and the frequency of his or her contributions to the plan.

Solution: There is no duration for the plan and the investor is free to change the contribution amount or stop the plan at anytime. Subject to minimum amounts per mutual fund, the investor is free to allocate the pre-determined amount to any number of mutual funds. Voluntary Accumulation Plans encourage a disciplined investing approach and helps the investor to avoid the temptation of market timing.

65

Which of the following statements about the simplified prospectus is TRUE?

Correct

The correct answer: It is not mandatory to deliver the simplified prospectus to investors, but is available upon request.

Your answer: It is not mandatory to deliver the simplified prospectus to investors, but is available upon request.

Solution: The simplified prospectus provides full, true, and plain disclosure of the material facts relating to the mutual fund. Material facts are those that have, or may have in the future, a significant impact on the market value of the fund. Although the fund facts document replaces the simplified prospectus as the primary disclosure document given to clients, the simplified prospectus continues to be an important document for investors. A prospectus must be approved by the provincial securities commission before any units of the mutual fund are offered for sale. Approval of the prospectus by the securities regulators does not guarantee that the investment is sound.

66

You recommend the Hastings International Equity Fund to your client, Amy. She has invested in mutual funds and stocks for a long time and is quite knowledgeable about investing. She would like to know if the Hastings International Equity Fund is subject to any investment restrictions. Where will you find this information?

Correct

The correct answer: annual information form

Your answer: annual information form

Solution: The Annual Information Form (AIF) which supplements the information in the simplified prospectus, is required to be filed with the simplified prospectus and Fund Facts document. Some of the information found in the AIF include: investment restrictions on the mutual fund, the description of units, methods to value the securities in the portfolio, and details of service providers. The AIF is required to be given to the client on request.

67

What is the role of the mutual fund distributor?

Correct

The correct answer: to facilitate investor mutual fund transactions

Your answer: to facilitate investor mutual fund transactions

Solution: The distributor is the sales and marketing arm of the investment fund manager responsible for bringing assets to the mutual fund through sales to investors. The distributor sells units to investors and transmits redemption requests to the investment fund manager. The distributor provides a link between the mutual fund and the investing public, facilitating investor mutual fund transactions. The investment fund manager calculates the fund's daily net asset value. The portfolio manager constructs and manages the portfolio of investments. The custodian provides safekeeping of mutual fund assets.

68

At the end of the business day, the Rosewater Canadian Equity Fund collected the following information:

What is the net asset value per unit (NAVPU) of the Rosewater Canadian Equity Fund?

Correct

The correct answer:

$6.28

Your answer:

$6.28

Solution: Rosewater Canadian Equity Fund's NAVPU is $6.28, calculated as ((total assets – total liabilities) ÷ number of units outstanding) or (($60,225,374 - $12,138,336) ÷ 7,659,890).

69

Lalita makes a Home Buyers' Plan (HBP) withdrawal of $25,000 from her registered retirement savings plan (RRSP) on January 31, Year 1. Which of the following statements is CORRECT?

Correct

The correct answer: She must repay a minimum of $1,666.67 each year for 15 years.

Your answer: She must repay a minimum of $1,666.67 each year for 15 years.

Solution: She must repay a minimum of $1,666.67 each year for 15 years, calculated as ($25,000 ÷ 15 years). She has until October 1, Year 2 to complete the purchase of her home. Her first HBP repayment must be made before March 1, of the third year. She has until 60 days into Year 17 to repay the funds.

70

What is the maximum age you can contribute to your own registered retirement savings plan (RRSP)?

Correct

The correct answer: 71

Your answer: 71

Solution: December 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP.

71

Joanne, a retired pensioner, is looking for an investment where she will receive a guaranteed monthly income for the remainder of her life. Since she is 71 years old, she has to choose one of the maturity options for her registered retirement savings plan (RRSP), which holds $650,000. She has no interest in managing the investment so it needs to be hassle free. She was advised by her daughter to consider buying a registered annuity. Which of the following statements about registered annuities is TRUE?

Correct

The correct answer: Registered annuities may either be life annuities or term certain annuities.

Your answer: Registered annuities may either be life annuities or term certain annuities.

Solution: Registered annuities may be registered life annuities or registered term certain annuities. A registered life annuity will provide a steady stream of income to Joanne for the rest of her life. The main advantage of a registered life annuity is Joanne will not outlive her retirement income payments. Once she purchases a registered life annuity, she will no longer have control over her investments. As a result, Joanne must be prepared to make decisions with respect to the registered life annuity at the time of purchase.

72

Ricardo  wants to transfer all his registered retirement savings plan (RRSP) assets to a registered retirement income fund (RRIF). He would like some clarifications on RRIFs. Which of the following statements would you say are TRUE?

Correct

The correct answer: Growth of investments in a RRIF is tax-sheltered.

Your answer: Growth of investments in a RRIF is tax-sheltered.

Solution: RRIF accounts have a minimum but no maximum withdrawal limit. Ricardo can transfer his RRSP to a RRIF but no in-cash contributions are allowed. There is no minimum age for opening a RRIF, but Ricardo can postpone opening a RRIF until the end of the year in which he turns 71.

73

Fernanda turned 71 last week. She has total assets of $850,000 in her registered retirement savings plan (RRSP) account. She has come to you for guidance about her maturity options. She is very clear on the fact that she is not interested in paying any tax on her hard-earned RRSP savings at this time. What would you tell her?

Correct

The correct answer: She may roll over her RRSP funds to a registered retirement income fund (RRIF).

Your answer: She may roll over her RRSP funds to a registered retirement income fund (RRIF).

Solution: All money withdrawn from an RRSP is subject to income tax. A lump sum withdrawal of Fernanda’s entire RRSP will result in her having to pay taxes on the entire amount. Fernanda will be able to roll over her entire RRSP balance in-kind to a RRIF without paying any tax. She will of course have to pay tax on RRIF withdrawals. Since the money originates from a RRSP and not pension monies, she is not able to roll over to a LIRA or a LRIF.

74

Mario and Jasmine are a married couple. Last year, Mario earned $30,000 in employment income and contributed $3,500 to Jasmine's spousal registered retirement savings plan (RRSP). Earlier this year, Jasmine terminated the plan and withdrew the entire $3,500 from the spousal RRSP. Which of the following statements is CORRECT?

Correct

The correct answer: Mario must declare $3,500 in taxable income for this year.

Your answer: Mario must declare $3,500 in taxable income for this year.

Solution: Canada Revenue Agency (CRA) has special attribution rules regarding withdrawals from spousal RRSPs. If one makes a withdrawal from a spousal plan in the year in which one contributes to that spousal plan, or in the following two years, the withdrawal is taxed in the contributor's hands and not those of the spouse.

75

Which of the following statements regarding Single Life Annuity is TRUE?

Correct

The correct answer: The annuitant is guaranteed to receive a lifetime income.

Your answer: The annuitant is guaranteed to receive a lifetime income.

Solution: A single life annuity guarantees the annuitant a lifetime income so he or she will never outlive the annuity payments. The annuitant cannot increase his or her withdrawals, and the annuity is not convertible to a RRIF.

76

Which of your following clients may be eligible to receive the Allowance?

Correct

The correct answer: John, age 63, whose spouse is eligible to receive an Old Age Security (OAS) pension and Guaranteed Income Supplement (GIS) benefits

Your answer: John, age 63, whose spouse is eligible to receive an Old Age Security (OAS) pension and Guaranteed Income Supplement (GIS) benefits

Solution: John may qualify to receive the Allowance since he is between the ages of 60 and 64 and his spouse is eligible to receive both the OAS and GIS pension. He must also meet other criteria including an income test, residency qualifications, and citizenship or legal resident status requirements. Juliet, Jacinta, and Janet do not qualify for the Allowance based on their ages.

77

Your client, Akshay, has been living in Canada for five years. He is turning 65 this year and is keen to know from you details about the Old Age Security (OAS) Program. What will you tell him?

Correct

The correct answer: Recipients are subject to a means test and their OAS pension benefits may be clawed back.

Your answer: Recipients are subject to a means test and their OAS pension benefits may be clawed back.

Solution: To be eligible for an OAS pension, a pensioner must be 65 years of age or older and a Canadian citizen or legal resident. He or she must also meet residency requirements to receive partial or full benefits. OAS pension benefits are subject to a means test whereby pensioners with incomes above a specified threshold begin to have their pensions clawed back at a rate of $0.15 for every $1 of income above the threshold. OAS pensions are considered taxable income. OAS benefits can be deferred until age 70. For every month that an individual is willing to defer benefits, the benefit is increased by 0.6% per month, up to a maximum of 36% at age 70.

78

This year, Anne's taxable income is $45,000. She receives an additional $550 in Canadian dividends from her mutual fund investments. The dividend gross-up is 138% and the federal dividend tax credit is 15.02%. Using the federal tax rates below, how much net federal tax will Anne pay on her dividend income?

Correct

The correct answer: $52.98

Your answer: $52.98

Solution: Since Anne’s taxable income is $45,000, her marginal tax rate is 22%. Anne will pay $52.98 of net federal tax, calculated as follows:

79

This year, Lynnette had the following transactions:

sold her Canadian equity fund in her non-registered account and realized a capital gain of $3,000

sold her U.S. equity fund in her registered retirement savings plan (RRSP) and realized a capital loss of $2,000

sold her bond fund in her tax-free savings account (TFSA) and realized a capital gain of $1,500

Which of the following statements is correct?

Correct

The correct answer: Lynnette will realize taxable capital gains of $1,500.

Your answer: Lynnette will realize taxable capital gains of $1,500.

Solution: Transactions within Lynnette's registered accounts (i.e. RRSP and TFSA) do not trigger any tax implications. She will not have to report the $1,500 of capital gains in her TFSA. But it also prevents her from using the capital losses from her RRSP to offset her capital gains. The only transaction that will impact her taxes is the $3,000 capital gain in her non-registered account. Only 50% of her capital gains need be reported, so her taxable capital gain is $1,500, calculated as ($3,000 x 50%).

80

Which of the following tax slips will unitholders in a mutual fund trust receive to inform them of their investment income?

Correct

The correct answer: T3

Your answer: T3

Solution: T3 tax slips are mailed to unitholders informing them of the amounts of each type of income received.

81

Dividends from which of the following qualify for the dividend gross-up and credit mechanism?

Correct

The correct answer: all Canadian corporations residing in Canada paying taxable dividends

Your answer: all Canadian corporations residing in Canada paying taxable dividends

Solution: Dividends received from all Canadian companies residing in Canada paying taxable dividends are eligible for the dividend gross-up and credit mechanism. The amount of the gross-up and credit is different depending on whether the paying company is a Canadian-controlled private corporation or a Canadian public corporation. Generally, dividends paid from Canadian mutual funds are grossed up by 38% and then receive a credit of 15.02% on the grossed-up amount. Foreign dividends do not qualify for this favorable tax treatment.

82

Which  of the following statements regarding switches within a non-registered account is TRUE?

Correct

The correct answer: Switches between the same fund family do not result in a deemed disposition if the mutual fund shares are corporate class funds.

Your answer: Switches between the same fund family do not result in a deemed disposition if the mutual fund shares are corporate class funds.

Solution: Switches from one class of shares to another within a mutual fund corporation do not immediately trigger a deemed disposition. The tax consequences from these transactions are deferred until the time the shares are redeemed from the corporate structure. In a mutual fund trust structure, switching from one mutual fund to another triggers a deemed disposition for tax purposes. The 10% free redemption limits refers to the investor's ability to redeem a portion of his or her mutual fund without incurring any deferred sales charge. The tax liability will be determined based on how the mutual fund is structured.

83

What effect does a return of capital have on the investor's net capital gain?

Correct

The correct answer: It will increase the unitholder's capital gain when the units are redeemed.

Your answer: It will increase the unitholder's capital gain when the units are redeemed.

Solution: A return of capital will not be taxable but instead will reduce the adjusted cost base of units owned. This will increase the unitholder's capital gain (or reduce a capital loss) when the units are redeemed.

84

Franklin's total income is $98,000. He has deductions available for RRSP ($8,000) and childcare ($6,000). He also has a refundable tax credit of $1,500. Using the federal tax rates below, how much of Franklin's taxable income is taxed at his federal marginal tax rate (MTR)?

Correct

The correct answer: $40,439

Your answer: $40,439

Solution: The marginal tax rate is the rate of tax an individual pays on the last dollar earned. First, Franklin has to determine his taxable income. It is $84,000, calculated as (Total Income - Tax Deductions) or ($98,000 - $8,000 - $6,000). According to the tax table, his MTR is 22% and the amount of income subject to this MTR is $40,439, calculated as ($84,000 - $43,561).

85

How is foreign income earned treated for tax purposes under the Income Tax Act?

Correct

The correct answer: The full amount of foreign dividend and interest income is to be included for tax purposes.

Your answer: The full amount of foreign dividend and interest income is to be included for tax purposes.

Solution: Foreign income such as dividend and interest income does not receive any preferential tax treatment and must be reported on your Canadian tax return. However, any withholding tax paid to a foreign government on this income may qualify for a foreign tax credit to avoid double taxation.
Capital gains earned on foreign property receive the same preferential tax treatment as that applicable on domestic property. Only 50% of the capital gain is reported as income.

86

Jerome's taxable income is $50,000. His federal tax payable is $7,950 and his average tax rate is 15.90%. He discovered that he has an additional $2,000 tax deduction that he can use. What impact will this deduction have?

Correct

The correct answer: It will lower his taxable income by $2,000.

Your answer: It will lower his taxable income by $2,000.

Solution: The $2,000 tax deduction will lower his taxable income by this amount. His federal tax payable will also decrease but not by $2,000. The decrease will depend on his marginal tax rate. His average tax rate will also decrease as a result.

87

Alex Kwan has come to you for some advice on his investments. Alex is a single, 41 year old recruitment specialist, earning $120,000 per year. As a hobby, Alex buys older homes, renovates them, and then sells them again for a profit. Alex's goal is to retire from his job in 12 years and flip homes full-time. He believes that he does not need to draw from his retirement funds until he is 60 years old. Currently, he has an RRSP worth $210,000. With his demanding job and his home renovation venture, Alex feels that he does not have time to devote to his investment portfolio. He is aggressively seeking growth in his investments and is very comfortable with investments whose values may fluctuate significantly. Given the information, which of the following fund of funds (FOF) portfolios could Alex consider?

Correct

The correct answer: 20% bond fund, 40% Canadian equity fund, 40% international equity fund

Your answer: 20% bond fund, 40% Canadian equity fund, 40% international equity fund

Solution: Given the scenario, Alex is interested in long-term growth since he does not need the money until he retires in 19 years. He also has expressed a high tolerance for risk. In considering a FOF portfolio, Alex could select a more aggressive offering which is heavily weighted towards equities. From the above portfolios, the one that has the greatest equity exposure is 20% bond fund, 40% Canadian equity fund and 40% international equity fund. 

88

One of Gio's clients wants to invest in the Freedom North America Fund. Gio is not familiar with this mutual  fund and wants to do some research on it. How should Gio go about researching this mutual fund?

Correct

The correct answer: He should review all the key information about the mutual fund from disclosure documents and third-party sources.

Your answer: He should review all the key information about the mutual fund from disclosure documents and third-party sources.

Solution: Even though the trade is proposed by Gio's client, Gio has the obligation to assess suitability. To do so, he must know the product. The fund fact sheet is a great source of information but it is not the only source. Gio should access the other disclosure documents and third-party resources to obtain all the key information he needs to properly advise his client.

89

Gretchen Hoffman, aged 60, is a conservative investor who, in the short term, wants current income and growth of capital. Interest rates have been decreasing and she believes they will continue to decrease. Which of the following investments would be most appropriate for Gretchen?

Correct

The correct answer: a bond mutual fund

Your answer: a bond mutual fund

Solution: The best investment vehicle for her is the bond fund. Fixed income investments provide current income in the form of interest payments, and their returns usually have an inverse relationship to interest rate movements.

90

Ogden Wells wants to start a registered education savings plan (RESP) for his children, India Rose and Trisha, who are 2 years and 3 months old respectively. The RESP would be a family plan where both children are beneficiaries under the same plan. Since the children will not require the money for quite a while, Ogden believes that he can handle fluctuations in the account balance. His plan is to adjust the RESP to a more conservative portfolio closer to the time the children actually need the money. With his own investments, Ogden spends a lot of time reviewing his portfolio and holds primarily equity based mutual funds. As a businessman, he understands the business world and market environments. Which of the following portfolios would be the most appropriate for the early years of the RESP?

Correct

The correct answer: 100% equity fund

Your answer: 100% equity fund

Solution: Based on the above information, Ogden has a high risk-tolerance and is conversant with equity funds and volatility. He has a sufficiently long time horizon. Bearing in mind his investment objectives and risk tolerance, a well diversified equity fund would be the most appropriate investment for the RESP.

91

In a non-registered account, Bob has $25,000 each invested in the following mutual funds:

dividend fund

bond fund

equity fund

specialty fund

He has unused registered retirement savings plan (RRSP) contribution room of around $25,000 available and wants to use one of the four mutual funds as a contribution.

From a tax efficiency viewpoint, which of the following mutual funds would be the most appropriate for Bob to move into his RRSP?

Correct

The correct answer: bond fund

Your answer: bond fund

Solution: In general, income that does not have preferential tax treatment, such as interest income, should be held in registered plans as much as possible. Income with preferential tax treatment, such as dividends and capital gains, should be held in non-registered plans as much as possible. Therefore, the most appropriate mutual fund to place in his RRSP would be the bond fund where most of the return is in the form of interest.

92

Robert has a portfolio  of around $100,000 which he invests in a highly concentrated emerging markets mutual fund. He believes that the emerging markets are the markets that one should be in to make money. He does not believe in diversifying into other asset classes and has remained fully invested in the emerging markets. He cites the growth rate of his portfolio as a supporting argument. What is the behavioural aspect that Robert is exhibiting?

Correct

The correct answer: overconfidence

Your answer: overconfidence

Solution: Robert should be made aware of the overconfidence that he is exhibiting. He should be made aware of the risks of his portfolio concentration and the benefits of diversification.

93

Manny and his wife, Missy, are in the process of purchasing a cottage. While they are completing the transaction, they want their funds to earn some interest. The investment must also be short-term in nature and provide them with liquidity and safety of principal. Which of the following income funds meets their needs?

Correct

The correct answer: money market fund

Your answer: money market fund

Solution: For Manny and Missy, the money market fund is the most appropriate investment. They need a mutual fund to provide them with interest income, safety of principal, and liquidity. The money market fund meets all these requirements.

94

Which of the following are likely to be suitable clients for a balanced fund?

Correct

The correct answer: Investors looking for income and growth.

Your answer: Investors looking for income and growth.

Solution: Balanced funds offer investors a combination of income and growth. Their portfolios will have a mix of both fixed income and equities to achieve these objectives. The income provided from a balanced fund is not guaranteed. Balanced funds are typically classified as low to medium or medium risk.

95

Ruben is a retired pensioner looking to invest $10,000. He is interested in an income stream that receives preferential tax treatment. Which of the following investments would be most appropriate for Ruben?

Correct

The correct answer: Reliable Canadian Dividend Fund

Your answer: Reliable Canadian Equity Dividend Fund

Solution: Ruben's primary investment objective is tax-preferred income. Therefore, the most appropriate investment for him is the Reliable Canadian Dividend Fund that will provide him with a regular income stream in the form of Canadian dividends. The dividends will benefit from the gross-up and tax credit mechanism.

96

What is the commonly witnessed behaviour of investors selling their winning investments too early and holding their losing investments known as?

Correct

The correct answer: disposition effect

Your answer: disposition effect

Solution: Understanding investor behaviour can be quite complex. People want to naturally increase their joy and avoid pain. Disposition effect is the tendency for investors to sell their winning investments too early and to hold their losing investments too long. Clients may be overconfident by overestimating their knowledge and underestimating the risks they take. Others may express their dissatisfaction or concerns but may not be ready to deal with their problems. This is an implied need. When they are ready to address the problems, it is then referred to as an explicit need.

97

Your client Danny informs you that he is very concerned about the future cost of his daughter’s education. Fifteen years from now when his daughter is scheduled to start university, he wants to have $75,000 saved up for her. He asks you to implement a savings and investment plan to meet this objective. What does Danny’s request indicate?

Correct

The correct answer: explicit need

Your answer: explicit need

Solution: Danny has expressed his concern about the future cost of education for his daughter. However, he is addressing this problem asking you to help him start a savings and investment plan. This is an explicit need.

98

Your client wants to buy a mutual fund to provide maximum after-tax income with minimal volatility. What would you recommend?

Correct

The correct answer: Canadian dividend fund

Your answer: Canadian dividend fund

Solution: The best option to recommend is the Canadian dividend fund. Although they are considered equity funds, they tend to be more conservative than mutual funds focused on price appreciation of its investments. Canadian dividend funds typically seek large, established companies that have consistent dividend histories and preferred shares. They tend to also be medium risk or lower depending on the portfolio. Your client would benefit from the dividend gross-up and tax credit mechanism. Typically, money market and bond funds are less risk but their interest income does not receive preferential tax treatment.

99

With 20 years of investment experience, Monica, a dentist, has weathered many market downturns . She has aggressively invested in several types of securities including mutual funds, stocks, bonds, and derivatives. Monica also owns several rental properties. She has amassed a net worth of $1,800,000 from her various investments and real estate properties. She does not worry about losses in her investments since they can be used to offset her gains. She plans to semi-retire from her dental practice now at age 50 and retire fully in fifteen years. She can work part-time in her practice earning approximately $95,000 annually. This amount is sufficient to meet her expenses and she has the ability to earn more if she needs the money. How would you classify Monica's risk tolerance?

Correct

The correct answer: high tolerance for risk

Your answer: high tolerance for risk

Solution: Monica has mentioned that she is an experienced investor. She also has weathered many market downturns without worrying much about it. Therefore, she appears to have a high tolerance for risk. However, one thing you must keep in mind is Monica's desire to retire in 15 years. She may become more conservative over time if she wants to use her investments to provide a retirement income.

100

Which of the following individuals can begin selling securities?

Correct

The correct answer: Gloria, who received formal confirmation of her registration from the provincial securities commission.

Your answer: Gloria, who received formal confirmation of her registration from the provincial securities commission.

Solution: Mutual fund dealing representatives can begin selling securities only after they receive confirmation from the provincial securities commission.