Canada National Instruments

UNIT 1

Review from Quiz

  1. Which organization produces Canada's National Instruments?
  • Since securities regulation in Canada is provincially based, the Canadian Securities Administrators (CSA) was formed to coordinate and harmonize regulation across Canada's capital markets. The aim of the CSA is to achieve national consistency in the area of securities law. They do so with the use of national instruments.
  1. A client wants to open an account and make an initial deposit but does not have sufficient proof of identification with him, so you are unable to verify his identity. What are you permitted to do?
  • If you are unable to identify an individual or entity at the time of opening an account, you are allowed to accept the initial deposit but you are not allowed to carry out any other transaction until you have identified the client. If a client is evasive or unwilling to provide sufficient information for adequate identification, you should inform your compliance department.
  1. One of your potential clients, Jean-Francois, does not want to provide his personal information. He wants to know from you as to what constitutes “personal information.” Which of the following constitutes personal information as defined under Personal Information Protection and Electronics Documents Act (PIPEDA)?
  • PIPEDA has rules governing what private sector organizations can do with personal information. The definition of personal information under the Act is any factual or subjective information, recorded or not, about an identifiable individual. Personal information includes:
  • age, name, weight, height
  • medical records
  • ID numbers, income, ethnic origin, or blood type
  • opinions, evaluations, comments, social status, or disciplinary action
  • employee files, credit records, loan records, dispute with a merchant, intentions (for example, to acquire goods or services, or change jobs)
  • It does not include:
  • an employee's name, title, business address or telephone number (such as information on a business card)
  • A company's website address is not considered personal information.
  1. Which of the following statements about the Mutual Fund Dealers Association (MFDA) is CORRECT?
  • The MFDA is the self-regulatory organization for the distribution side of the Canadian mutual funds industry. Not all provinces require mutual fund dealers to join the MFDA. The MFDA has the authority to fine, suspend or terminate the membership of its members.
  1. What does the Mutual Fund Dealers Association (MFDA) have the power to do?
  • The MFDA is empowered by securities regulators in each of the enumerated jurisdictions to:
  • admit members
  • perform compliance reviews
  • enforce rules through a transparent disciplinary process that can result in fines, suspension, or termination of membership
  • Initiating securities legislation is the role of the government. The Canadian Securities Administrators draft national instruments. The MFDA does not have the ability to compensate victims of fraud.
  1. Which of the following statements about the Ombudsman for Banking Services (OBSI) is TRUE?
  • The Ombudsman for Banking Services (OBSI) is not a regulator but an independent and impartial organization whose objective is to attempt to resolve disputes between participating banking services and investment firms and their clients. As of August 1, 2014, all dealers and advisors must be OBI members, except for those located in the province of Quebec. OBSI can provide recommendations to settle claims up to $350,000. There is no separate limit of $150,000 for fraud claims. As an alternative to the legal system, OBSI provides a mechanism to ensure member firms deal fairly with their customers.
  1. To which of the following entities does the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) apply?
  • PCMLTFA implements reporting and other requirements for entities susceptible to being used for money laundering or terrorist financing. This includes financial entities, life insurers, money service businesses, those involved in real estate, securities dealers, dealers in precious metals and stones, and casinos.
  1. Which of the following organizations is regulated under the Personal Information Protection and Electronic Documents Act (PIPEDA)?
  • PIPEDA is Canada's private sector privacy law. PIPEDA establishes rules for how federally regulated, private sector organizations such as banks, telecommunications companies, and transportation firms may collect, use, or disclose personal information about customers or employees in the course of commercial activities. The public sector is governed by the Privacy Act.
  1. Which one of the following is a Politically Exposed Foreign Person (PEFP)?
  • Individuals are considered politically exposed foreign persons if they or any of their immediate family hold or held any of the following positions in a foreign country:
  • head of state or government
  • member of the executive council of government or legislature
  • deputy minister (or equivalent)
  • ambassador or ambassador’s attaché or counsellor
  • military general (or higher rank)
  • president of a state-owned company or bank
  • head of a government agency
  • judge
  • leader or president of a political party in a legislature
  • What responsibilities do provincial and territorial securities commissions have?
  • The provincial and territorial securities commissions have the responsibility of registering dealer firms and individual registrants for their province or territory. The Office of the Superintendent of Financial Institutions Canada (OSFI) regulates insurance companies, federally regulated deposit-taking institutions, and federally regulated private pension plans. The Ombudsman for Banking Services and Investments (OBSI) provides dispute resolution services for investors. The provincial and territorial securities commissions do not compensate victims of fraud.

UNIT 2

Review from Quiz

  1. Suryono is unclear about Mutual Fund Dealers Association (MFDA) rules regarding client communications, and seeks your help. Which of the following statements about MFDA client communication rules is CORRECT?
  • MFDA rules on client communication include only written communication, including trade communications and account statements. It does not include advertising and sales communication.
  1. Josh has a client, Arnold, who read somewhere about the Client Relationship Model (CRM). He asks Josh about the objective of the relationship disclosure requirement of CRM. Which of the following replies should Josh give to Arnold?
  • The objective of the relationship disclosure is to ensure that clients understand their obligations to the dealing representative and vice versa. In addition, clients should also be made aware of the service levels and costs so that clients can decide on the level of services.
  1. Which of the following practices is acceptable?
  • In the case of excessive trading, you must justify that the transactions were in the client's best interest. It is never acceptable to have pre-signed forms for your clients. Securities related business must be conducted within the mutual fund dealer.  You or your mutual fund dealer are not allowed to accept or act on a POA for a client of the mutual fund dealer.
  1. Which of the following statements about excessive trading is correct?
  • Excessive trading is a prohibited practice where the dealing representative recommends trades that do not benefit the client but instead generates commissions for the dealing representative. It can only be justified if the trades were in the client's best interest.
  1. All of the following individuals are registered as dealing representatives with mutual fund dealers. They also have outside business activities. Which individual has engaged in an inappropriate outside business activity?
  • Outside business activities is permissible as long as it is permitted by legislation, approved by the mutual fund dealer, and does not pose any conflict of interest. Being dually licensed for insurance and mutual funds is permissible. Most likely Don's and Lorenzo's activities would be acceptable if these activities do not pose any conflict. Ruben is conducting securities related business outside the mutual fund dealer; this is considered inappropriate.
  1. Which of the following rules pertain to your registration as a mutual fund dealing representative?
  • The securities regulatory authority must be informed of any material or significant change in your personal circumstances. You must be registered in the province in which you wish to sell mutual funds by the appropriate provincial securities regulatory authority, but you do not need to live there. You cannot begin to sell securities until you have received formal confirmation from the securities regulatory authority, not the Fi, that your application for registration has been approved and registration granted. Only the authorized firm representative (AFR) of a mutual fund dealer can submit filings through NRD.
  1. How often must you renew your registration?
  • There is no requirement to renew your registration.
  1. Which of the following statements about the use of forms pre-signed by your clients is TRUE?
  • You may not obtain pre-signed forms from clients. MFDA rules prohibit use of pre-signed forms. You may only use forms that are duly executed by the client after information has been properly gathered on the form. The use of pre-signed forms could be indicative of discretionary trading which is prohibited.
  1. What would be considered a sales communication?
  • A sales communication includes any communication relating to a mutual fund that induces the public to invest in that mutual fund. This includes printed material, audio and visual displays, and personal endorsements. Part 1.1 of NI 81-102 specifically excludes the prospectus, the annual information form, financial statements, trade confirmations, and statements of account.
  • Henry is a dealing representative with ABC123 Mutual Funds Inc. One of his clients, Sophie, is currently going through a divorce. Sophie’s husband Trevor also holds an account with the mutual fund dealer, handled by another dealing representative at a different branch. Sophie asks Henry to give her a printout of Trevor’s transaction history for the past six months. Henry refuses to give a printout, but offers to look up Trevor’s account on his computer and give her the major details verbally. Has Henry acted unethically?
  • Information and data on office computers are to be used only for official purposes. By reviewing the account of one of his dealer’s clients with whom he has no formal relationship, Henry has acted unethically and is also likely in violation of his company’s privacy policy. The fact that he did not give a printout, or receive any compensation, or that it is a common practice does not make the action ethical.

UNIT 3

Review from Quiz

  1. Gilles and Marielle Lachette 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. They have come to you for advice. They want to take this money and use it to retire early. What do tell them? 
  • As a dealing representative, you have a regulatory obligation to ensure that every client transaction is suitable for your client. The process starts with knowing your client. You have to find out about the client's:
  • financial circumstances
  • risk tolerance
  • investment knowledge
  • investment needs and objectives

You next have an obligation to know your product. This involves having an in-depth knowledge of all products that you recommend to your clients. The last step is to match the characteristics of a proposed investment, as determined by the due diligence conducted in the KYP process, with the stated needs of the client, as documented in the KYC information.

  1. You have a new client, Daniel Frost. During your meeting, the topic of risk comes up in your conversations. Daniel is quite adventurous in his personal life and feels that he is a risk taker. Which of the following actions would be appropriate?
  • Risk tolerance is very difficult to determine. You cannot make assumptions or tell the client what their risk tolerance should be. It is your obligation to interview the client to determine their appropriate level of risk. You should make clients aware that risk is about their ability to withstand financial losses not just about their attitudes. You should use actual dollar figures in your discussions with clients to help them to better understand the concept. You should also make clients aware of the correlation between risk and return. Higher returns generally mean higher risk.
  1. Which of the following statements about leverage is TRUE?
  • Even though a bank has approved your client for a loan, you must still decide for yourself whether leverage is a suitable strategy. The bank’s decision will be based on different criteria. Using borrowed funds to invest can help magnify returns but it will also magnify any losses, especially if the value of the investment drops below the amount of the loan. Leverage is permitted by the MFDA but you must ensure it is suitable for your client. Part of the assessment is ensuring your client can meet the loan obligations even if the investment value drops.
  1. You have a meeting with Max, a prospective new client. Max is very busy and can give you only half an hour for the meeting. When you attempt to ask questions required by the KYC rule, Max becomes impatient and asks you to stop wasting his time and tell him which mutual funds are winners. What should you do?
  • You need to find out more about your client before you make a recommendation. You need to impress upon Max that it is in his best interest to answer the questions. Only by getting the KYC information can you properly service his financial needs. It may require you to re-book another meeting to allow for the required time to collect the information.
  1. Under the Know Your Client rule, which of the items listed below is not essential to obtain from your client?
  • It is not essential to know the client's educational background when collecting information to meet the Know Your Client obligation. However, additional information beyond the Know Your Client information can sometimes be very useful for a dealing representative to obtain.
  1. Which of the following regarding know your product (KYP) is TRUE?
  • You have failed in your KYP duties because you don’t know enough about this new product to make a recommendation. These may be composed of mutual funds you already know, but the managed portfolio is a new product. You have done no due diligence of your own to be able to tell a client how the product is structured, taxed, or generates returns, its risk factors, fees, or what role it can play in a portfolio. You are not entitled to simply rely on the fact that your dealer has already approved these products for sale.
  1. Your client wants to take advantage of a period of low interest rates and make an investment using borrowed funds. Which of the following statements about leverage is TRUE?
  • If you borrow money to invest, you owe interest payments no matter what happens to your investment. If it drops in value, you still owe interest, so you have suffered more than someone who did not borrow. The value of the leveraged portfolio may even fall below the value of the loan. Even where returns on leveraged investments are positive, interest costs may exceed the returns received.

Despite low interest rates or the tax deductibility of interest payments, leverage is not suitable for everyone. You must assess whether it is a suitable investment using KYC and KYP criteria.

  1. Your client, Roderick, likes to call you up and request transactions that you feel are unsuitable for him. What should you do?
  • When a client requests an unsolicited trade, you are still required to do a suitability assessment on the product. If you view the product as unsuitable, you must tell the client and document the details. You should check with your compliance department on whether or not you can refuse the trade.
  1. What step in the Strategic Investment Planning Process involves changing and evolving the investment plan over time?
  • Monitoring the investment plan involves changing and evolving the strategic investment plan over time. As your client's needs change, so will the investment plan.
  • Lou Romano, a financial planner, meets with his client, Reena Shah. Reena and Lou have already determined her investment objectives and gathered her financial data. Reena likes to read the business news and is eager to invest in the latest investment trend. She likes to call Lou with these ideas, but he is hesitant to endorse any investments that require a great deal of risk since Reena is an impatient investor. Where are Lou and Reena in the investment planning process?
  • At this step of the planning process, Lou needs to assess Reena's financial resources, as well as any other constraints that might affect her ability to meet those objectives, such as declining health, risk tolerance, or in Reena's case, her investment knowledge.

UNIT 4

Review from Quiz

  1. Which market facilitates the trading of stocks and bonds?
  • The capital market is a trading place for financial assets such as stocks and bonds. It is typically a longer-term market.
  1. Which of the following statements about the financial markets is true?
  • Financial markets serve borrowers and lenders in three ways:
  • channeling funds from lenders to borrowers
  • facilitating the timing of purchases
  • providing a mechanism for government policy

The primary market is where shares are first issued by the issuer to investors. The secondary market is where shares are subsequently traded amongst investors. Direct financing is where the lender and borrower transact with each other directly. In most situations, a financial intermediary is used such as a bank to facilitate this transfer of capital.

  1. Which of the following items could be changed as part of a fiscal policy?
  • Fiscal policy consists of the government's use of spending and taxes to influence the overall level of economic activity. Changes in government spending and changes in the tax amounts collected are all fiscal policy measures. Adjusting money supply, interest rates, or attempts to alter exchange rates are monetary policy measures.
  1. When is market equilibrium reached?
  • Market equilibrium is reached when the quantity of a good supplied at a given price equals the quantity demanded for that good at that same price.
  1. What does Gross Domestic Product measure?
  • 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.
  1. Which of the following are characteristics of investment capital?
  • The characteristics of capital are:
  • Scarcity
  • Mobility
  • Sensitivity

Scarcity refers to the limited supply of capital and mobility is the ease and speed with which capital moves from one part of the world to another. Sensitivity is the degree to which investment capital is influenced by changes in financial markets and the overall economy.

  1. Which of the following statements is an example of monetary policy?
  • Monetary policy is the responsibility of the Bank of Canada, and it is used to control the supply of money in the economy. Increasing interest rates is an example of monetary policy.
  1. ABC Corporation is attempting to raise $100 million from the financial market. It is offering to issue shares to the public through an Initial Public Offering (IPO). The shares are priced at $25 and investors from all over the world are likely to subscribe to the IPO. In which market is ABC corporation attempting to raise funds?
  • ABC corporation are issuing their shares in the primary market. Through the initial public offering, they are raising capital directly from investors. 
  1. Which of the following statements about purchasing power is TRUE?
  • Purchasing power is the amount that you can buy with your dollar. If inflation rises, then prices for goods and services rises. Henceforth, rising inflation erodes your purchasing power.
  • What happens to the supply of the good or service produced when the sale price increases?
  • The supply of the good or service produced increases when the sale price of the good or service increases.

UNIT 5

Review from Quiz

  1. Ted buys a 4% coupon paying bond for $5,500. The bond will mature in 10 years with a face value of $5,000. What is Ted's current yield?
  • The bond pays $200 each year in interest, calculated as ($5,000 x 4%). The price of the bond has no impact on the coupon payment. Since Ted bought the bond at a premium (he paid $5,500 for a bond with a face value of $5,000), his current yield will be lower than the 4% coupon rate. Ted's current yield is 3.64%, calculated as (($200 coupon payment ÷ $5,500 price of the bond) x 100).
  1. All of the following organizations are issuing new 5 year bonds. Which bond issuer would offer the lowest coupon rate?
  • One of the major factors in setting the coupon rate is the credit worthiness of the issuer. The Government of Canada has the highest credit rating and therefore, can offer the lowest coupon rate.
  1. What rights do owners of common shares possess?
  • Common shareholders have the right to vote at shareholders' meetings or by proxy. The board of directors determines when dividends will be paid. Preferred shareholders, as well as common shareholders, have the right to receive a proportion of a corporation's profits in the form of dividends, but it is not fixed, guaranteed, or even necessarily in cash. Preferred shareholders have priority over common shareholders in the payment of dividends.
  1. What statement is generally TRUE with respect to the coupon rate on outstanding bonds?
  • Coupon rates are fixed over the life of a bond.
  1. Which of the following types of shares offers investors the greatest guarantee relating to the payment of dividends?
  • Most preferred shares are cumulative, which means that if a dividend is not paid, it accumulates and must be paid in full to preferred shareholders before any dividends can be made to common shareholders.
  1. What does it mean if preferred shares are redeemable or callable?
  • If a preferred share is redeemable or callable, the issuing company has the right to force the investor to sell the shares back to the company at a pre-determined price. Retractable preferred shares give the investor the ability to demand the company buy back the shares on or after a specified date.
  1. In general, what type of benefit do preferred shareholders enjoy over common shareholders?
  • In the event of bankruptcy, preferred shareholders are given a prior claim to the remainder of the company's assets ahead of common shareholders. Therefore, preferred shareholders have a preference as to assets over common shareholders. Preferred shareholders do not have the voting privileges that common shareholders enjoy. The dividend payments for preferred shares are not guaranteed. In contrast to common shareholders, preferred shareholders do not have the right to share in the successes of the company beyond their right to the fixed dividend, unless they hold participating preferred.
  1. Karl is a wheat farmer. He is nervous about the price of wheat this year and decides to enter into a futures contract to set the price for his wheat. Which of the following statements is correct?
  • With a futures contract, there is a legal obligation to buy or sell the underlying asset when the contract comes due. Karl is hedging the price of wheat since he wants to receive a guaranteed price when he is ready to sell his wheat.
  1. What is a benefit of purchasing treasury bills (T-bills)?
  • T-bills are highly liquid since they can be bought and sold with ease on the secondary market. They are not insured with the IPC, but rather guaranteed by the Government of Canada. Yields are usually lower than long-term bonds since T-bills are shorter terms and pose less risk. T-bills are subject to inflation risk.
  • Why would a yield curve be inverted?
  • Inverted yield curves are downward sloping indicating that short-term bonds have higher rates than long-term bonds. This suggests investors expect rates to decline. This can be a sign that a recession is forthcoming.

UNIT 6

Review from Quiz

  1. According to the investment objectives of the Chesapeake Fund, the fund manager may vary the asset mix of the portfolio in response to changing market conditions. Although the fund typically holds a combination of fixed income and equity securities, the fund manager is not restricted by any limitations on asset categories. What type of fund is Chesapeake?
  • Chesapeake Fund is an asset allocation fund. The fund manager for an asset allocation fund may vary the asset mix of the portfolio in response to changing market conditions. Generally, these funds have no restrictions on the asset mix of the portfolio.
  1. The manager of the Venture Fund has invested the portfolio as follows: 5% in cash, 40% in fixed income, 30% in Canadian equities, and 25% in foreign equities. The investment objectives of the fund restrict the manager from holding greater than 40% of the fund in foreign equities. He also has to maintain between 40% and 60% of the portfolio in fixed income. What type of mutual fund is the Venture Fund?
  • Balanced funds invest in a combination of cash, bonds, and stocks. Most balanced funds are required to hold minimum percentages of each type of investment, according to objectives set out in the fund's prospectus. Usually, there is a range specifying the minimum and maximum limits for each asset category. The Venture Fund would fall under this category.
  1. Which of the following is a benefit of investing in open-end mutual funds?
  • Mutual funds offer many benefits including professional management, liquidity, low cost, convenience, and diversification. Mutual fund returns are not guaranteed and there is no principal guarantee feature. Open-end mutual funds are not exchange traded, but rather units are bought and redeemed directly through the mutual fund company, also known as the investment fund manager.
  1. James owns an investment that can mimic the return of the Toronto Stock Exchange (TSX) index. If he wants to sell his investment, he can do so on the TSX. What type of investment does James own?
  • Exchange-traded funds (ETFs) are open-end investment funds whose units are traded on an exchange. ETFs can be bought and sold at any time when the exchange is open. They are purchased or sold through an investment dealer or broker.
  1. Kennedy is looking for an investment that will provide her with long-term capital growth. Since she has invested before, Kennedy has a medium to high risk tolerance and wants to now diversify her holdings to include investments outside of Canada. Furthermore, she does not require an income stream from the investment. Which classification of mutual fund would meet Kennedy's requirements?
  • International and global equity funds are suitable for investors who have a medium, medium to high, or high risk profile. They provide investors with international diversification. Since most international and global equity funds invest in businesses, their objective is long-term capital growth and not income.
  1. Diane is a retired widow who wants a monthly income from her mutual fund portfolio. She is concerned about losing money so the ideal investment would be a fairly conservative fund. Which of the following mutual funds can provide a monthly income but is low risk?
  • Diane needs a fund that provides her a monthly income and is fairly conservative. A mortgage fund would fulfill her requirements. A money market fund is probably too conservative and will not provide her with sufficient income. A balanced fund or Canadian dividend fund may exceed Diane's comfort level with risk.
  1. From a general risk and return point of view, which of the following ranks the set of mutual funds from lowest risk/return to highest risk/return?
  • In general, mutual funds would rank from lowest risk/return to highest risk/return as follows:
  • money market funds
  • fixed income funds (mortgage, bond)
  • balanced funds (balanced, asset allocation, target date)
  • equity funds (Canadian, global, international, sector)
  • specialty funds (labour-sponsored, real property, commodity pools)
  1. Your clients, Ravi and Nuzah Patel, both 30 years of age, recently married. They want to purchase a home in the near future and have already started saving for the down payment. They received $12,000 cash from their wedding and are looking for an investment that provides safety of principal, low risk, and some interest income. They do not want their investment to go down in value since they want the money available if they find the perfect home. Which of the following types of mutual funds meets the criteria?
  • Since their goal is capital preservation, the Patels require an investment that is safe and secure. The most appropriate investment would be a money market fund that protects their capital while also providing them with interest.
  1. Which of the following products has the potential to provide protection from creditors?
  • Segregated funds are the life insurance industry's equivalent to mutual funds. Since they are life insurance products, segregated funds have the potential to provide protection from creditors.
  • What is characteristic of a closed-end mutual fund?

A closed-end mutual fund may be listed and sold on a stock exchange. These funds issue a set number of shares when the company is organized. Since there are a set number of shares, interested investors can purchase the fund from current shareholders only, through the secondary market. This process does not normally involve the issuing company. The price of the shares may or may not reflect the net asset value per unit (NAVPU). The NAVPU is based on the value of the investments held by the fund, while the price is subject to market conditions.

UNIT 7

Review from Quiz

  1. If a fund has a beta of 2, what is the expected outcome for the fund?
  • The market or index to which a fund is compared is given a beta equal to 1. If a fund has a beta of 2, its price is expected to rise or fall by twice as much as the overall market. In other words, it should outperform (or underperform) the market by 100%
  1. What effect will a mutual fund distribution have on its price?
  • When a mutual fund distributes its earnings out to unitholders, it lowers net asset value. This in turn, lowers its net asset value per unit (or price). In essence, the price will decrease in value equivalent to the distribution.
  1. What type of analysis looks for insight into a company from their financial statements?
  • Fundamental analysis focuses on looking at he fundamentals of a company such as revenues, assets, profits, and competitive position. Fundamental analysts use a company’s financial statements as a major source of information. However, they may also speak with its management, customers and suppliers to get a better picture of a company’s situation. They also consider macroeconomic factors such as the economy, inflation and interest rates and how those factors could impact a company’s earning potential.
  1. Health, an equity analyst, is reviewing a company’s financial statements to determine its profitability. Which statement would show a company’s net profit or loss?
  • A company’s net profit or loss is shown on its income statement. The purpose of the income statement is to show the revenue and expenses of a company for the fiscal year. If revenues exceed expenses, there will be a net profit. If revenues are less than expenses, the company will show a loss.
  1. On January 3, Connie Lynne purchases 100 units of Cornerstone Canadian Equity with a net asset value per unit (NAVPU) of $10. Later that year, on December 15, the mutual fund’s NAVPU moves to $11 and it makes a distribution of $1 per unit. Connie’s distribution is automatically reinvested at a NAVPU of $10. What is the market value of Connie’s investment on December 15 after the distribution and reinvestment?
  • Connie’s original investment is $1, 000, calculated as (100 units’ X $10 NAVPU).
  • The total distribution is $100, calculated ad (100 units’ X $1 per unit).
  • When the distribution is reinvested Connie receives 10 additional units’, calculated as ( NAVPU).
  • Therefore, she has a total market value of $1, 100, calculated as [(100 units’ + 10 units) X $10 NAVPU on December 15]
  1. Dana, a portfolio manager for a Canadian small capitalization fund, is analyzing the price-to-earnings ratio (P/E) for two mining companies. Richtree has a P/E ratio of 20 while Drake Gold’s ratio is 10.85. What can Dana infer from the information?
  • P/E ratio is an important valuation ratio. A higher P/E ratio exhibits investor confidence in the company. It measures the investment value of a security in comparison to its share price. Profitability ratios are important to help determine whether a company is making money or not. However, these are ratios do not relate back to the share price. Portfolio managers examine the current as well as future expected profit data when analyzing ratios for investment purposes. Hence Investors are willing to pay $20 for every $1 of earnings of current income of Richtree.
  1. Which investment management strategy relies on the belief that over time it is very hard to outperform the market?
  • With a Passive strategy, the portfolio manager is relying less on his or her stock-picking skills and more on the ability to track the underlying benchmark closely. The rationale behind this is the belief that over the long term, it is vey difficult for individual portfolio managers to outperform the markets as a whole.
  1. Derek, 20 years old is a keen investor. He has attended several seminars on investing and is eager to undertake investing as full-time activity. He is not clear about systematic risk and systemic risk. Which of the following statements best describe systematic risk?
  • Systematic risks include interest is also referred to as market risk. It affects everyone and cannot be avoided. Systematic risks include interest rate changes, unanticipated inflation, recession and wars. Systematic risks can be compared to the risk of bad weather. In the event of an earthquake, everyone is vulnerable to it and there is no way it can be stopped.
  1. What type of analysis is also known as charting?
  • Technical analysis is also known as charting. Technical analysts rely heavily on charts to identify patterns or indicators to predict future price movements.
  • What type of approach is Selene taking if she analyzes the macroeconomic environment, then the industry, then the individual companies?
  • The top-down approach begins with looking at the overall economy and current market trends to determine the industries, markets and/or countries that are expected to perform well. Then the portfolio manager narrows it down further to pick individual companies that they believe will outperform its competitors.


UNIT 8

Review from Quiz

  1. What is the role of the auditor in terms of a mutual fun’s financial reporting requirements?
  • The auditor is meant to preserve the integrity of the financial reports and eliminate any real or perceived imbalances in the reporting. Mutual funds, like public corporations, must be audited by an independent auditor and comply with international Financial Reporting Standards (IFRS). Hence The auditor is required to confirm annually that proper valuation techniques were employed.
  1. Aileen Grogan is considering investing mutual funds but has some concerns since she recently read about an investment house going bankrupt. She wants to know how her mutual fund investment would be protected should her investment fund manager declare bankruptcy?
  • By law, the investment fund manager cannot commingle (mix) fund assets with any other assets that they own or administer. To ensure this, the mutual fund assets are held by a third party or custodian. An independent auditor must regularly review the operations of a mutual fund and its manager. As described above, there is also no commingling of mutual fund assets with the mutual fund dealer. OBSI only resolves disputes between clients and their firms. The independent review committee's role is to oversee potential of interest decisions involving the manager of an investment fund.
  1. What are the delivery requirements for mutual fund disclosure documents?
  • The main disclosure documents prepared by a mutual fund are:
    • a Fund Facts document for every class or series of a mutual fund
    • the simplified prospectus
    • the annual information form
    • annual and interim financial statements
    • annual and interim management reports of fund performance

An investor must receive the Fund Facts document within two days of buying a mutual fund. All other documents are available to clients upon request.

  1. On January 23, two years ago, Janet invested $6, 000 in a fund that has the following schedule of deferred sales charges:

Time

In the 1st year

2nd year

3rd year

4th year

5th year

6th year

7th year

Charges

6%

5%

4%

3%

2%

1%

0%

On January 23, of this year Janet redeems her entire investment worth $8, 800. According to the prospectus, charges are calculated on the original purchase amount. How much did Janet pay in fees?

  • Janet redeemed her mutual fund in the 3rd year. The first year ran from January 23, Year 1 to January 22, Year 2. The second year also ran from January 23, Year 2 to January 22, Year 3. Janet redeemed her units on January 23, Year 3 so she was into her third year, therefore, she paid $240 in fees, calculated as (original value x % DSC) or ($6,000 x 4%). Note that in this case the DSC was based on the original purchase price. In other cases, it could be based on the proceeds at redemption.
  1. Phuong has $1, 500 tax refund and would like to invest it in the LACROIX Capital Fund. It currently has a net asset value per value (NAVPU) of $5. 75 and her dealing representative will sell the fund with a front-end sales charge of 1.5%. If she invests today, how many units would she purchase?
  • Phuong's purchase price for her mutual fund is $5.84, calculated as ($5.75 NAVPU ÷ (1 – 1.5%)). She will receive 256.9565 units, calculated as ($1,500 ÷ $5.84). Note: To receive an accurate calculation, do not clear your calculator. Otherwise, you will incur a rounding error.
  1. What is the main role of a mutual fund’s Independent Review Committee (IRC)?
  • The role of the IRC is to review any and all conflict of interest matters and proposed actions that it receives from the investment fund manager. Conflicts of interest are defined in principles-based terms in National Instrument 81-107 Independent Review Committee for Investment Funds.
  1. What statement regarding registered education savings plans (RESPs) is correct?
  • As a subscriber, you contribute to an RESP for the benefit of your designated beneficiary(ies). You may contribute a lifetime maximum of $50,000 per beneficiary. There is no annual limit. Your contributions are not tax deductible. If the designated beneficiary does not proceed to a post-secondary institution, contributed principal is returned to the subscriber without any tax implications. CESGs are available to all qualified beneficiaries despite family income; however, low income families may receive a greater amount of CESG.
  1. Which if the following statements about net asset value per unit (NAVPU) is TRUE?
  • The formula for net asset value per unit is total assets minus total liabilities divided by units outstanding. Assets of the fund include the fund's investment portfolio, cash and near-cash investments as well as accounts receivable from dealers. Liabilities include expenses incurred, dividends paid to investors and redemption amounts.
  1. John Smith invested $100, 000 in a Canadian Equity mutual fund and paid 4% front-end sales charge. The net asset value per unit (NAVPU) of the fund at the time of purchase was $10. John decides to set up a ratio withdrawal plan under which he receives an annual payment at the end of each year based on 8% of the market value of his investment at the time of the withdrawal. His first withdrawal is due when the fund is valued at $11.75 per unit. Approximately what amount does john withdraw this year?
  • John Smith withdraws $9,024 in the first year, calculated as follows: Step 1: Determine the purchase price. Given the 4% front-end sales commission, the purchase price for John's units is $10.42, calculated as ($10 NAVPU ÷ (1 – 4% front-end sales charge)). Step 2: Determine the number of units purchased net of commission charges. John purchases 9,600 units, calculated as ($100,000 ÷ $10.42). Note: To receive an accurate calculation, do not clear your calculator. Otherwise, you will incur a rounding error. Step 3: Determine the number of units redeemed via 8% ratio withdrawal plan. John will redeem 768 units, calculated as (9,600 x 8%). Step 4: Determine the amount withdrawn. John will receive a total of $9,024, calculated as (768 units’ x $11.75 NAVPU).

Last year, Clarence contributed $5, 000 to his tax free savings account (TFSA). This year, he withdrew the entire $5, 000 plus $200 incomes that had accumulated from his initial contribution. HE made no contribution to his TFSA this year. How much may he contribute to his TFSA next year? Assume the maximum contribution amount is $5, 000 for all three years.

For next year, Clarence’s TFSA contribution room is:

In respect of next year

In respect of the total withdrawal

In respect of unused contribution room this year

Total

$5, 000

$5, 200

$5, 000

$15, 200


UNIT 9

Review from Quiz

  1. Samara enjoys her work very much and has no plans to retire at age 65. Which of the following statements about Canada Pension Plan (CPP) is correct?
  • She can apply for her pension anytime between ages 60 and 70. There is no requirement to stop working in order to receive the benefits. If she waits until after age 65 to collect her pension the benefit amount rises by 0.7% per month for each month past her 65th birthday. CPP benefits are not subject to any clawback of benefits.
  1. What characteristic about a defined benefit pension plan is true?
  • Defined benefit plans may be financed solely by the employer, or through contributions made by both employee and employe Since the employer guarantees a defined benefit at retirement, the employer assumes the investment risk. Benefit amounts may be calculated based on a flat rate, best or last years, or average career methods. Retirement benefits are taxable.
  1. What is the major advantage of a group registered retirement saving plan (RRSP) over an individual RRSP?
  • If you contribute to an individual RRSP, you can claim a tax deduction for the contribution and then receive a tax refund after filing a tax return for the year. If you contribute the same amount to a group RRSP, contributions are made via payroll deductions. Based on your marginal tax rate (MTR), your employer withholds less tax each month from your pay. Instead of waiting for your tax refund, you receive immediate tax savings. Effectively, by waiting for your tax refund, you have given an interest-free loan to the government. Employer contributions are optional. All contributions to group RRSPs impact an individual's RRSP contribution room. The amount of investment alternatives depends on the plan, but typically, group RRSPs have fewer investment alternatives. The employee accepts all the risk in either a group or individual RRSP.
  1. Robert withdraws $25, 000 from his registered retirement savings plan under the Home Buyer’s Plan (HBP) on Jan 31, year 1.
  • Robert must complete the transaction by October 1st of the year after the withdrawal. He will be required to repay the amount in 15 equal instalments. No interest is required to be paid on the withdrawal. His first HBP repayment must be made at the latest on Mar 1, Year 4.  If Robert is married, his spouse can also withdraw up to $25,000 from his or her RRSP.
  1. Ellie is leaving her employer and wants to transfer out her vested pension funds to a locked-in retirement account (LIRA). Which of the following statements about Ellie's LIRA is correct?
  • Like an RRSP, Ellie controls the investments within her LIRA. Unlike an RRSP, she cannot make any contributions to the plan, withdraw from it, or convert it to a RRIF. Generally, she may not access these funds until retirement She may convert her LIRA to a life income fund (LIF) or locked-in retirement income fund (LRIF) to provide a life income.
  1. Paulette is 62 years of age. She was born in Austria but immigrated to Canada when she was 40 years old. She has resided in Canada ever since and even became a Canadian citizen at the age of 45. She wants to know if she qualifies to receive Old Age Security (OAS) benefits. What can you tell her?
  • Paulette must be 65 years of age before she can qualify for OAS benefits. She will not receive the full benefit since she has not lived in Canada for 40 years since being 18 years of age but will qualify for partial benefits.
  1. Your client, Rakesh, works for a manufacturing company. His employer has a defined contribution pension plan for its employees. Rakesh is curious about whether he should join the plan. What can you tell him about defined contribution pension plans?
  • A defined contribution pension plan defines the contribution that an individual and his or her employer will make each year before the employee’s retirement. The pension adjustment is based on these contributions. Employer contributions are not dependent on the profitability of the company but rather the pension guidelines specified by the plan. The employee is not guaranteed a particular benefit at retirement. The amount available for retirement is instead dependent on how well the investments are managed.  
  1. Simone will turn 71 years of age on July 1st of this year. With respect to her RRSP maturity options, she intends to open a RRIF. What statement is correct?
  • In the initial year of her RRIF, Simone is not required to withdraw a payment. She may delay the withdrawal until the following year. There is no maximum withdrawal limit, she is free to withdraw any amount she wishes. Contributions to a RRIF are prohibited.
  1. As part of his tax planning strategy, Ian Elston wants to establish a self-directed spousal registered retirement savings plan (RRSP) for his wife, Debra. What is the last date on which Ian and Debra can contribute to their RRSPs and deduct the contribution from their current year’s tax return? Assume it is not a leap year.
  • If you want to deduct your contribution in the current taxation year, you must make the contribution within 60 days of the end of the year. The last day that Ian can contribute to the spousal RRSP and use the deduction for the current year’s tax return is March 1, of the following year, calculated as 31 days in January + 28 days in February + 1 day in March.
  • Which statement applies to self-directed registered retirement savings plans (RRSPs)?
  • Self-directed RRSPs offer investors a wide variety of investment options. The investor, who manages, is able to choose any combination of investments to meet his or her needs. The self-directed RRSP does not provide a guaranteed return. Instead it is dependent upon how the underlying investments perform. A trustee, such as a trust company, bank, or investment company administers the plan.

UNIT 10

Review from Quiz

  1. Pedro owns units of a balanced fund in a non-registered account. He receives a distribution from the mutual fund as follows:
  • $10 of Capital gains
  • $5 of Canadian dividends
  • $8 of interest Income
  • $2 of Foreign income
  • Income generated from investments in a non-registered account is taxable. However, depending on the type of income, investors may receive preferential tax treatment. There is no preferential treatment for interest or foreign income. However, you may be able to claim a tax credit on any foreign taxes paid to a foreign government. Only 50% of capital gains is taxable. As well, investors can use their capital losses to offset their capital gains. A tax credit is available for Canadian dividend income.
  1. Angie Wichniewicz is an interior designer. Following are the details of her income:

Salary                                    $46, 000

Dividends                             $600

Capital gains                        $5, 000

Deduction

RRSP contribution              $5, 800


What is Angie’s taxable income assuming a federal divided gross-up rate of 138%?

  • Angie's taxable income is $43,528 calculated as:

Salary                                                             $46,000

Dividends ($600 x 138%)             $828

Capital gains ($5,000 x 50%)       $2,500

RRSP contribution                          ($5,800)

Taxable income                  $43,528

  1. What portion of a person’s total income is used to calculate federal tax before tax credits?
  • Taxable income is the portion of a person's total income that is used to determine the amount of federal tax before tax credits.
  1. What is the tax treatment of dividends and interest income from foreign sources?
  • The tax treatment of foreign income under the provisions of the Income Tax Act is that interest and dividends are fully taxable at the individual's marginal tax rate. Investors may be able to claim a tax credit for any taxes paid to a foreign government.
  1. Doug’s taxable income is $85, 000. The federal tax for the year are as follows:

Level of Taxable Income                                      Federal Tax Rate

            $0 to $43, 561                                                                                15%

            $43, 562 to $87, 123                                                                     22%

            $87, 124 to $135, 054                                                                  26%

            More than $135, 054                                                                   29%


            Which of the following statements is correct?

  • Since Doug's taxable income is $85,000, his marginal tax rate is 22% according to the table. The Canadian tax system is progressive which means the first $43,561 of Doug's income is subject to a tax rate of 15%; income above $43,562 up to $87,123 is taxed at 22%. Since Doug’s income of $85,000 falls within these two amounts his marginal tax rate is 22%.  
  1. Monica is curious about the different types of accounts. She wants to know how each is treated for tax purposes. What can you tell her?
  • Contributions to a RRSP are tax deductible for the contributor but not to a TFSA. Income earned in registered plans (RESP, TFSA, RRSP, RRIF, and RDSP) is not taxable until the money is withdrawn from the plan.
  1. Gloria sold two mutual funds this year:

Global equity fund                        European equity fund

Cost                                        $10, 000                                           $15, 000

Sale price                              $12, 500                                           $8, 000

            Which of the following statements about capital gains and losses is true?

  • Gloria has a capital gain from her Global equity fund of $2,500, calculated as ($12,500 - $10,000). She has a capital loss from her European equity fund of $7,000, calculated as ($8,000 - $15,000). Only 50% of her capital gains or losses are included in her tax calculation and she can use her capital losses to offset her capital gains. Therefore, Gloria will have a net capital loss for the year of $2,250, calculated as (($2,500 capital gain x 50%) – ($7,000 capital loss x 50%)).
  1. Constance has very little income this year because she is on a sabbatical. She owes $250 in taxes but has a non-refundable tax credit of $500 available to her. Which of the following is most likely to occur?
  • The non-refundable tax credit can only reduce Constance's tax payable to $0. It cannot generate a tax refund
  1. Which of the following is not available from distribution from a mutual fund?
  • Capital losses are not distributed by mutual funds. Instead capital losses are used to offset realized capital gains within the mutual fund. As a result, the distribution of a capital gain to unitholders is referred to as a net capital gain.
  • What portion of a realized capital gain is subject to tax?
    • The portion of a realized capital gain that is subject to tax is 50%.


UNIT 11

Review from Quiz

  1. Derek is an active investor in the stock market. His reading of the market is very good and he makes the right stock picks at the right time. However, he does not make as much profit as he should be making because he sells his winners too soon and holds on to his losing stocks for too long hoping something will bring them back to their original levels. What is the behavioural aspect which Derek has to be made aware of?
  • The disposition effect is the tendency to perform actions that increase joy and avoid actions that increase pain. In terms of investing, investors tend to sell winners too early and ride losers too long.
  1. You have a new client, Jason. During your meeting, he mentions that he grew up poor and is worried about his retirement. However, you know that he earns a good living and has been able to save a significant amount for retirement. How should you proceed?  
  • Listening to and communicating with your client is an essential part of building a trusting relationship. Jason has provided you with valuable information about his past which should give you a clue to his risk tolerance. It's important to ask more questions to see if a problem exists. You may find that he is not comfortable with the volatility of his investments. Or he feels he's not saving enough. By identifying the problem if there is one, you can help him to look for solutions.
  1. Which of the following information would you find on a fund fact sheet?
  • The fund fact sheet provides investors with an easy to read document that displays the key features of a mutual fund including:
  • quick facts
  • top holdings and investment mix by industry
  • risk classification
  • client profile
  • general tax statement
  • fund performance
  • fees
  • investor rights
  • other information
  1. What can be said about life cycle investing?
  • With life cycle investing, a client's age is used as a starting point to decide on an appropriate asset allocation. Younger clients could consider a more aggressive asset mix given that they tend to have longer time horizons. As clients mature, the asset allocation evolves becoming more conservative over time as clients approach their investment goals. The life cycle approach can be utilized by any client; it is not dependent on age or account size. You should not rely on it exclusively since other considerations such as the client’s investment knowledge and experience, investment objectives, and risk tolerance should be the basis for deciding which asset allocation strategy is appropriate. 
  1. Janice Brewster, age 58, plans to retire at age 65.  She received cash of $40,000 as part of a divorce property settlement. Janice would like to use the $40,000 to take a trip around the world when she retires. Janice will take a longer and more luxurious trip if more money is available. Since Janice has been your client for a while, you know she has invested in a variety of mutual funds and is fairly comfortable with risk. She is knowledgeable enough about investments to understand market fluctuations. You have determined that she is looking for an investment that provides growth but with some income, a low to medium risk level and intermediate term time horizon. Given the information, which of the following mutual funds best matches Janice's needs?
  • Given Janice's requirements of:
  • low to medium risk level
  • intermediate term time horizon
  • growth objective with some income

the balanced fund most closely matches her needs. She is comfortable with some risk and has invested before. The balanced fund invests a portion in equities, which provides growth but also in fixed income which helps provide some stability to the portfolio

  1. Considering he has no financial or family obligations, Charles believes he can afford to take risks with his investment portfolio. As a chemical engineer, he earns $130,000 per year working for a large oil producer in Fort McMurray, Alberta. At 45 years of age, Charles has an RRSP worth $400,000 and an investment portfolio valued at $320,000. He has dabbled in various investments including mutual funds, stocks, bonds, and options. Since he enjoys working and has no plans for retirement, Charles has no immediate need for this money. His main objective for his investments is long-term capital appreciation. What asset mix would be the most appropriate for Charles?
  • According to Charles, he wants long-term capital appreciation. He also mentions that he can afford to take some risks. A growth portfolio would be most appropriate for Charles.
  1. Siri chat, a mutual fund dealing representative is recommending a portfolio consisting of an asset-mix of 70% equities and 30% fixed income securities to her client. Which type of an asset allocation is Siri chat recommending?
  • An aggressive growth portfolio will contain all of its assets in equities. The aggressive growth portfolio will have the highest volatility. A growth portfolio will have a greater component of equities and a relatively smaller component of fixed income. A balanced portfolio will have a greater component of equities, a smaller component of fixed income and a still smaller component of cash and cash equivalents. A conservative portfolio will have the largest component of fixed income followed by smaller components of equities and cash and cash equivalents.
  1. You are meeting with a new client, Katya. You determine that Katya wants to retire this year and start withdrawing money from her registered retirement savings plan (RRSP) to fund her living expenses. She tells you that she has very little investment experience, only buying guaranteed investments from her bank. When you talk about her investments going down in value, Katya looks worried and expresses concern about having enough money for retirement. How would you most likely classify Katya's risk tolerance?
  • Katya has indicated that she has a short time horizon since she is looking to use her money to fund her retirement this year. She also has told you that she has very little investment experience and knowledge and is quite nervous about market volatility. You most likely would classify her as low risk.
  1. Which of the following individuals has implemented the most tax efficient strategy?
  • If possible, hold assets in registered plans where income can be tax sheltered. In addition, TFSAs allow investors to withdraw from the plan without tax consequences. Tyra has the most tax efficient strategy since she only holds assets in a TFSA. Sunil's equity index fund tends to be more tax efficient because of the passive management strategy. Less transactions mean less realized capital gains compared to actively managed funds. Glenn could improve his tax efficiency by holding his international equity fund in his non-registered account and the bond fund in his RRSP. Capital gains generated from the international equity fund receive preferential tax treatment whereas the interest from his bond fund does not. From a tax perspective, Claudette's mortgage fund is not very tax efficient. But there may be other reasons why she has this investment that override the tax considerations.
  • In your research, you have discovered the following information.

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

What can you conclude from this information?

  • There are many ways to analyze a mutual fund. This is just some of the information you may consider. The quartile rankings (1 to 4) compare the performance of a mutual fund relative to other mutual funds of the same category. Top quartile mutual funds (i.e. 1) are the best performers while bottom quartile mutual funds (i.e. 4) are the worst performers. Trillium is a top quartile mutual fund. Rates of return only tell part of the story. The risk level of the mutual fund must always be considered. The Sharpe ratio combines the two aspects for comparison purposes. The Sharpe ratio is a measure of the rate of return of the mutual fund per unit of risk. A higher Sharpe ratio means a portfolio manager was able to deliver more return for the risk he or she took. Another consideration is that these indicators are based on past performance. It is important to understand that past performance is not a guarantee of future performance. The only thing you can conclude for sure from this information is that Trillium's costs are higher than Primus based on the higher MER.


EXAM REVIEW

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:

Monday

Tuesday

Wednesday

Thursday

Friday

$10.23

$10.22

$10.34

$10.25

$10.31

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:

 Total assets at market value

 $60,225,374

 Long-term liabilities

 $12,138,336

 Units outstanding

 7,659,890

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?

Level of Taxable Income

Federal Tax Rate

First $43,561

15%

Over $43,561 to $87,123

22%

Over $87,123 to $135,054

26%

Over $135,054

29%


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:

Dividend received

$550.00

Grossed-up taxable dividend ($550.00 x 138%)

$759.00

Federal income tax ($759.00 x 22%)

$166.98

Less dividend tax credit ($759.00 x 15.02%)

$114.00

Net federal tax

$52.98

 

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)?

Level of Taxable Income

Federal Tax Rate

First $43,561

15%

Over $43,561 to $87,123

22%

Over $87,123 to $135,054

26%

Over $135,054

29%


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.

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