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Credit Coach: Volume 2 Practice Test 1
Reports
Overall Results
Score:
0%
Questions
Number
Correct
Your Score
1
100
0
0%
2
100
0
0%
Attempt
You did not pass the test.
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Learning Domain Results
Score:
0%
Questions
Number
Correct
Your Score
Investment Analysis
18
0
0%
Portfolio Analysis
18
0
0%
Mutual Funds
14
0
0%
Exchange-Traded Funds
11
0
0%
Other Managed and
Structured Products
14
0
0%
Canadian Taxation
8
0
0%
Fee-Based Accounts and
Working with the Retail
Client
6
0
0%
11
0
0%
Learning Domain
Working with the
Institutional Client
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Question Results
1. Why do defensive industry stocks tend to hold up relatively well in recessionary times?
The correct answer is:
A.
Stable return on equity (ROE).
You chose:
B.
Need for external financing.
C.
Volatile cash flows.
D.
More sensitive to inflation.
Feedback: Defensive industries have relatively stable return on equity (ROE). They tend to do relatively well during recessions. The term
blue-chip denotes shares of top investment quality companies that maintain earnings and dividends through good times and bad. This
record usually reflects a dominant market position, strong internal financing and effective management.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
2. Which type of company has the highest degree of earnings stability?
A.
Utilities.
B.
Forest products.
C.
Retail merchandising.
D.
Transportation.
Feedback: In both the U.S. and Canada, some consumer stocks have generated such stable long-term growth that they are considered
defensive. The utility industry would be considered an example of a defensive blue-chip industry.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
3. DMV Inc.’s share price breaks through the moving average line from above on heavy volume. Which type of trading signal does this
indicate?
A.
Sell.
B.
Accumulate.
C.
Buy.
D.
Hold.
Feedback: If the price breaks through the moving average line from above on heavy volume and the moving average line itself starts to
fall, the upward trend is reversed. This is a sell signal.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
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4. Adit is selling her technology stocks when the vast majority of investors expect their price to rise. What is Adit's investment style?
A.
Contrarian.
B.
Diversified.
C.
Dynamic.
D.
Passive.
Feedback: Sentiment indicators focus on investor expectations. Contrarian investors use these indicators to determine what the majority of
investors expect prices to do in the future, because contrarians move in the opposite direction from the majority. For example, the
contrarian believes that if the vast majority of investors expect prices to rise, then there probably is not enough buying power left to push
prices much higher and the investor will decide to sell the stocks.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
5. When is a stock’s price said to have reached a "support level"?
A.
Investors sense value and are willing to buy.
B.
Investors sense that value and supply is high.
C.
Prices fall below resistance levels.
D.
Supply exceeds demand and prices reverse.
Feedback: A support level is the price at which the majority of investors start sensing value, and therefore are willing to buy (demand is
strong), and the majority of existing holders (or potential short sellers) are not willing to sell (supply is low).
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
6. What makes a technical analyst's ability to predict market movements most challenging?
A.
Mass investor psychology.
B.
More rising than falling stock prices.
C.
Large market price changes.
D.
Low trading volumes.
Feedback: In times of uncertainty, factors that cannot be predicted by the use of technical analysis, such as mass investor psychology,
which may cause investors to act irrationally, can also affect market prices. This can make the technical analyst's job much more difficult.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
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7. During a recession, which industries would be the most appropriate to include in the investment portfolio of a risk-averse investor?
1.
2.
3.
4.
Forest products.
Banking.
Utilities.
Automobile.
A.
2 and 3.
B.
1 and 2.
C.
1 and 4.
D.
3 and 4.
Feedback: During a recession, industries that are considered to be defensive typically outperform cyclical or speculative industries. In this
question, the banking and utility industries are considered to be defensive, while forest products and automobiles are considered to be
cyclical.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
8. CCK stock closed at the following prices during the course of the last trading week:
Monday
Tuesday
Wednesday
Thursday
Friday
$15.50
$18.00
$18.25
$17.50
$17.75
What is CCK's five-day moving average as of the close of trading on Friday?
A.
$17.40.
B.
$17.13.
C.
$17.67.
D.
$17.75.
Feedback: A moving average is simply the sum of the closing prices divided by the number of closing prices. In this case, the closing
prices for the five trading days equal $87. This sum is then divided by five to get the moving average of $17.40.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
9. What is a key assumption of technical analysis?
A.
All influences on market activity are automatically accounted for.
B.
Future prices cannot be predicted by analyzing past patterns.
C.
Investor behaviour rarely repeats itself.
D.
Prices move in trends, but trends rarely persist in the long term.
Feedback: Technical analysis is the process of analyzing historical market action in an effort to estimate the probable future price trends of
stocks, automatically accounting for all influences on market activity.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
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10.What type of analysis is Guillermo performing if he uses moving averages to time his trades?
A.
Quantitative.
B.
Fundamental.
C.
Chart.
D.
Sentiment.
Feedback: Quantitative analysis is a form of technical analysis that relies on statistics and has thus been greatly enhanced by computer
technology. One general category of quantitative analysis tools used to supplement chart analysis is the moving average.
Reference | Chapter 13: Fundamental and Technical Analysis
Learning Domain | Investment Analysis
11. Which ratio is used to measure the comparative efficiency of a company in turning over its goods after deducting the cost of sales?
A.
Gross profit margin.
B.
Current ratio.
C.
Return on equity (ROE).
D.
Price-earnings (P/E) ratio.
Feedback: The gross profit margin ratio is useful both for calculating internal trend lines and for making comparisons with other
companies, especially in industries such as food products and cosmetics, where turnover is high and competition is stiff. The gross margin
is an indication of the efficiency of management in turning over the company’s goods at a profit. It shows the company’s rate of profit after
allowing for the cost of sales.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
12.Over the last five years, MHL has reported the following debt-to-equity ratio:
Current Year
2 Years Ago
98%
125%
What does the trend in the ratio indicate?
3 Years Ago
4 Years Ago
5 Years Ago
109%
160%
165%
A.
MHL has a declining reliance on debt.
B.
MHL has a declining reliance on current assets.
C.
MHL has an increasing reliance on inventories.
D.
MHL has an increasing reliance on fixed charges.
Feedback: Ratios calculated from a company’s financial statements for only one year have limited value. However, they become
meaningful when compared to other ratios either internally – that is, with a series of similar ratios of the same company over a period of
time.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
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13.Which company represents the best credit risk?
Working
Capital Ratio
Interest
Coverage
Cash Flow / Total Debt Ratio
Company A
1.10
7.83
41.87
Company B
1.85
2.25
12.54
Company C
4.16
12.25
19.78
Company D
3.50
9.12
29.23
Company
A.
C.
B.
A.
C.
B.
D.
D.
Feedback: A working capital ratio below two is considered to be poor; a low cash flow/total debt ratio is negative; and interest coverage is
generally considered to be the most important quantitative test of risk when considering a debt security, and a higher ratio is considered to
be better than a lower ratio. Of Company A, B, C and D, Company C has the highest working capital ratio and interest coverage, with a
cash flow/total debt ratio at a reasonable level. Although, Company A had the highest cash flow/total debt ratio, the other two ratios were
not strong.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
14.In each of the last five years, what is the ideal minimum equity value per preferred share an investor should look for?
A.
Two times the entitled dollar value of assets.
B.
One time the entitled dollar value of assets.
C.
Three times the entitled dollar value of assets.
D.
Four times the entitled dollar value of assets.
Feedback: Analysts like to see that the minimum equity value per preferred share in each of the last five fiscal years is at least two times
the dollar value of assets that each preferred share would be entitled to receive in the event of liquidation.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
15.What can be indicated by a firm's high dividend payout ratio?
A.
Declining earnings.
B.
Consistent dividend while cyclical earnings peak.
C.
Share buyback policy.
D.
Earnings reinvested.
Feedback: As earnings fall, the dividend number in the payout ratio is divided by an ever smaller earnings number and the overall ratio
becomes larger.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
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16.What is the working capital of a company with $2,500,000 in current liabilities, $6,500,000 in current assets and $10,000,000 in long-term
bonds outstanding at 6%?
A.
$4,000,000.
B.
$3,500,000.
C.
$7,500,000.
D.
$9,000,000.
Feedback: Working capital is calculated as the excess of current assets over current liabilities, and helps measure the amount of cash a
company would have to continue operating after covering all current liabilities by current assets. In this example, the company has
$4,000,000 ($6,500,000 – $2,500,000) in working capital. The bonds would be a long-term liability and not relevant to a consideration of
working capital.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
17.What can be determined for a company by analyzing the cash flow/total debt outstanding ratio?
1.
2.
3.
4.
Ability to repay all the funds it has borrowed.
Ability to generate fund’s internally.
Ability to pay interest charges on its debt.
Net tangible assets available to cover the total debt outstanding.
A.
1 and 2.
B.
1 and 3.
C.
2 and 4.
D.
3 and 4.
Feedback: The cash flow/total debt outstanding ratio gauges a company's ability to repay all the funds it has borrowed.
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
18.Based on the dividend discount model, what is ABC Inc.’s approximate intrinsic value if its expected dividend in one year is $1.20, the
discount rate is 6.30% and its long-term growth is expected to be continuous at 3.60%?
A.
$44.44.
B.
$33.33.
C.
$46.04.
D.
$88.89.
Feedback: The formula is Price = Div1 / (r – g). Div1 is the expected dividend paid out by the company in one year, r is the required rate of
return on investments and g is the assumed constant growth rate for dividends. Therefore, ABC Inc.’s price or intrinsic value is $44.44
[$1.20 / (.0630 – .0360)].
Reference | Chapter 14: Company Analysis
Learning Domain | Investment Analysis
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19.The table below presents annual returns on the SLE Equity Mutual Fund and its comparable benchmark over a three-year period.
Year
SLE
Benchmark
This year
15%
12%
Last year
-8%
-5%
Two years ago
4%
2%
What is SLE's beta relative to its benchmark over this three-year period?
A.
Greater than 1.0.
B.
Greater than zero but less than 1.0.
C.
Exactly 1.0.
D.
Less than zero.
Feedback: Any equity or equity portfolio that moves up or down to the same degree as the stock market has a beta of 1.0. Any security or
portfolio that moves up or down more than the market has a beta greater than 1.0, and a security that moves less than the market has a
beta of less than 1.0.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
20.What does beta measure?
A.
Stock returns relative to movements in the overall market.
B.
Stock returns adjusted for inflation.
C.
Stock returns relative to the industry peer group.
D.
Stock returns relative to the expected return on security.
Feedback: Beta measures the degree to which equity securities or equity portfolios tend to move up and down with the market. The higher
the beta, the greater the risk.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
21.What is an advantage of investing in a portfolio of securities?
A.
The risk of the portfolio is almost always less than the average of the risk of the securities held,
improving the risk/return trade-off.
B.
The individual risks of each security are averaged out, making a more balanced investment.
C.
The return of the portfolio is higher than the average of the returns generated by the securities
held.
D.
The risk of the portfolio is almost always greater than the average risk of the securities held,
increasing the expected return.
Feedback: While the return of the portfolio will be the weighted average of the returns of each security, the risk of a portfolio is almost
always less than the risk of the individual securities that make up the portfolio. This results in an improved risk/reward trade-off from using
the portfolio approach.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
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22.Which statistical measure is used to link the risk of individual equity securities to the market as a whole?
A.
Beta.
B.
Alpha.
C.
Standard deviation.
D.
Variance.
Feedback: Beta is a statistical measure that links the risk of individual equity securities to the market as a whole. Beta is important
because it measures the degree to which individual stocks tend to move up and down with the market.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
23.What measure denotes a perfect positive correlation in a portfolio?
A.
+1.
B.
-1.
C.
0.
D.
+100.
Feedback: If security price movements of two or more securities mirror each other exactly, or in other words they have a perfect positive
correlation, the correlation is denoted as a correlation of +1.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
24.What is the real rate of return of a portfolio with an annual return of 10% during a period when the inflation rate is 3.5% and the risk-free
rate is 4.5%?
A.
6.5%.
B.
5.5%.
C.
9.0%.
D.
13.5%.
Feedback: The real rate of return adjusts the nominal rate on a portfolio to reflect inflation. In this example, the real rate of return would be
calculated as 10% – 3.5% = 6.5%.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
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25.What is an attribute of investment risk?
1.
2.
3.
4.
Systematic risk, which is also known as specific risk.
Non-systematic risk can be eliminated through diversification.
Systematic risk reflects the negative correlation of a security to the market.
The more diversified a portfolio, the more it tracks the market.
A.
2 and 4.
B.
1 and 2.
C.
1 and 3.
D.
3 and 4.
Feedback: While non-systematic risk, also known as specific risk, can be eliminated by diversification, systematic risk is always present
and cannot be eliminated. Systematic risk stems from such things as inflation and high interest rates.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
26.Over the last five years, the returns on ABC stock and the S&P/TSX Composite Index were as follows:
Year
Return on
ABC Stock
Return on the S&P/TSX
Composite Index
1
12%
9%
2
6%
4%
3
-8%
-5%
4
-6%
-5%
5
10%
9%
What is the beta of ABC stock relative to the S&P/TSX Composite Index?
A.
Greater than one.
B.
Exactly one.
C.
Greater than or equal to zero, but less than one.
D.
Less than zero.
Feedback: Beta measures the volatility of a stock relative to the volatility of the stock market as a whole. A beta of one indicates that a
stock has the same volatility as the market, a beta less than one indicates that a stock had less volatility than the market, while a beta
greater than one indicates that a stock has more volatility than the market. In Years 1, 2, and 5, when the returns on ABC stock and the
S&P/TSX Composite were positive, ABC outperformed the market. In Years 3 and 4, when the returns on ABC stock and the S&P/TSX
Composite were negative, ABC underperformed the market. Thus, ABC's returns were more volatile than the market's, and its beta is
greater than one.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
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27.What is a characteristic of an investment manager who follows a value manager style of investing?
A.
Selects stocks that are currently out of favour with analysts.
B.
Focuses less on individual securities and more on promising industry sectors.
C.
Selects securities with high price/earnings (P/E) ratios.
D.
Trades more actively than growth managers.
Feedback: For value investing managers, the focus is on specific stock selection. They are bottom-up stock pickers as well, with a
research-intensive approach. Security turnover is typically low, as the manager will wait for a stock’s intrinsic value to be realized. Since a
stock is often cheap for a reason (it is out of favour), realizing its intrinsic value can take some time, if ever. Value managers seek stocks
that are often overlooked, disliked or out of favour with individual investors, institutional investors and equity analysts.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
28.Which type of portfolio manager seeks companies that are considered to have higher earnings potential?
A.
Growth manager.
B.
Credit quality manager.
C.
Sector rotation manager.
D.
Value manager.
Feedback: A growth manager will focus on current and future earnings of individual companies, specifically earnings per share (EPS).
They are looking for “earnings momentum”, and they will pay more for companies if they feel the company’s growth potential warrants the
higher price.
Reference | Chapter 15: Introduction to the Portfolio Approach
Learning Domain | Portfolio Analysis
29.The economy is moving into the late expansion phase of the equity cycle and the Bank of Canada is beginning to tighten monetary policy.
Which investment strategies would be recommended in this phase of the equity cycle?
1.
2.
3.
4.
Buy long-term bonds.
Reduce exposure to common stocks.
Increase exposure to cyclical stocks.
Buy short-term interest-bearing paper.
A.
2 and 4.
B.
1 and 2.
C.
1 and 3.
D.
3 and 4.
Feedback: Recommendation for the late expansion phase of the equity cycle is to reduce common stocks exposure and invest in shortterm interest-bearing paper. The equity cycle peak is generally followed by the contraction phase.
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
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30.Christine actively adjusts the strategic mix of her portfolios when she believes short-term opportunities exist for a particular asset class.
She then reverts back to the long-term mix. What type of asset allocation strategy is Christine using?
A.
Tactical.
B.
Dynamic.
C.
Ongoing.
D.
Integrated.
Feedback: Tactical asset allocation involves short-term tactical deviations from the strategic mix to capitalize on investment opportunities
in one asset class before reverting back to the long-term strategic allocation.
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
31.What is the investment strategy of purchasing fixed income securities with consecutive terms to maturity?
A.
Laddering.
B.
Spread trading.
C.
Fixed income arbitrage.
D.
Benchmarking.
Feedback: When an investment manager constructs a portfolio using a variety of terms to maturity, or durations, it is called laddering, with
the various consecutive maturities mimicking rungs on a ladder.
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
32.What is the Sharpe ratio for a portfolio with a return of 10% and a standard deviation of 1.2 when the risk-free rate is 4%?
A.
5.0.
B.
6.0.
C.
6.2.
D.
8.8.
Feedback: The Sharpe ratio, which compares a portfolio’s return to the riskless rate of return, taking its risk into account, is calculated as
(Porfolio return Rp – Riskless rate of return Rf) / standard deviation. In this example, it is 5.0 [(10% – 4%) / 1.2].
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
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33.A research department has issued the return expectations of the major asset classes as follows:
Minimum
Maximum
Cash and Equivalents
2.75%
4.25%
Fixed Income
2.25%
8.75%
Equities
-10%
25%
An investor has a $200,000 portfolio, invested 10% in cash, 25% in fixed income and 65% in equities. What are the minimum and
maximum expected percentage return on the portfolio?
A.
-5.7% to 18.9%.
B.
-1.7 % to 12.7%.
C.
-5.0% to 38%.
D.
-5.8% to 22.1%.
Feedback: First, you must determine the amount attributable to each of the asset classes. 10% = 20,000; 25% = $50,000; 65% =
$130,000. The minimum and maximum expected return for each class would be:
Minimum
Maximum
Cash and equivalents
$20,000
2.75% = $550
4.25% = $850
Fixed-Income
$50,000
2.25% = $1,125
8.75% = $4,375
Equities
$130,000
-10% = $13,000
25% = $32,500
Total
-$11,325
$37,725
Percentage
$11,325 / $200,000
$37,725 / $200,000
= -5.7%
= 18.9%
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
34.An investment advisor is evaluating a new client to determine an appropriate asset mix for her investments. The client is 45, single, with
no current or expected dependents. She has been investing extensively in a wide range of investment products and is quite comfortable
with risk. Her goal is to retire at 55, and then to travel extensively. She has no wish to leave an estate. What is the most appropriate asset
mix for her portfolio?
A.
Cash 5%/Fixed income 25%/Equities 70%.
B.
Cash 5%/Fixed income 75%/Equities 20%.
C.
Cash 10%/Fixed income 40%/Equities 50%.
D.
Cash 20%/Fixed income 70%/Equities 10%.
Feedback: This individual has no significant personal obligations other than to herself, and with a goal of retiring early to a reasonably
expensive lifestyle. Therefore, an aggressive, growth-oriented asset mix would most likely be appropriate. Thus, a high weighting in
equities, with some fixed income for diversification and cash for liquidity, would be indicated.
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
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35.Which strategies will a portfolio manager who anticipates a decrease in the general level of interest rates most likely pursue?
1.
2.
3.
4.
Extend the average term on bond investments held.
Shift long-term bonds to common equity.
Increase the portfolio’s duration.
Convert long-term bonds to short-term bonds.
A.
1 and 3.
B.
1 and 2.
C.
2 and 4.
D.
3 and 4.
Feedback: In general, when investment managers anticipate that the general level of interest rates will decrease, they would extend the
average term on their bond. Also, the higher the portfolio’s duration, the greater the gain from falling interest rates and the greater the
potential for capital gains.
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
36.A client has $50,000 to invest. She is risk-averse and does not want any loss of her initial investment. She will use the investment
proceeds to help finance the purchase of a cottage in one year. Which investment should be recommended?
A.
Treasury bill.
B.
Strip bond that matures in five years.
C.
50% in a balanced equity fund and 50% in a foreign bond fund.
D.
70% in a balanced mutual fund and 30% in a bond fund.
Feedback: One major objective is to have some assurance that the initial capital invested will largely remain intact. If this is the main
concern among the three primary objectives, the client is effectively saying that, regardless of whether a small, large or nil return is
generated on the capital, the advisor should try to avoid erosion of the amount initially invested. Government of Canada Treasury bills offer
the highest degree of safety – they are virtually risk-free.
Reference | Chapter 16: The Portfolio Management Process
Learning Domain | Portfolio Analysis
37.What fee might a mutual fund manager pay a mutual fund sales representative?
A.
A trailer fee.
B.
An administration fee.
C.
A set-up fee.
D.
A switching fee.
Feedback: A trailer fee, sometimes called a service fee, is a fee that a mutual fund manager may pay to the distributor that sold the fund.
This fee is paid to the mutual fund representative annually, as long as the client holds the funds. Trailer fees are usually paid out of the fund
manager’s management fee.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
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38.A mutual fund investor sold his holdings at a net asset value per share (NAVPS) of $11.00. The fund charges a redemption fee of 2%
based on the NAVPS at the time of redemption. What is the selling/redemption price the investor will receive?
A.
$10.78.
B.
$11.00.
C.
$11.02.
D.
$11.22.
Feedback: 11 – (11 x 2%) = $ 10.78.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
39.What organization is appointed by a mutual fund corporation to collect money received from the fund’s buyers and from portfolio income,
and arranges for cash distributions through dividend payments, portfolio purchases and share redemptions?
A.
Custodian.
B.
Distributor.
C.
Fund manager.
D.
Registrar.
Feedback: The custodian is appointed to fulfill this role. In some instances, the custodian may also serve as a fund’s transfer agent and
registrar; however, this is a distinct function separate from the custodian’s role.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
40.Who directly pays a mutual fund’s management fees?
A.
The fund.
B.
The fund managers.
C.
The representatives.
D.
The unitholders.
Feedback: All expenses are deducted directly from the fund, not charged to the investor.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
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41.A mutual fund organized as an open-end trust earns $850,000 in investment income, composed of $500,000 in capital gains, $250,000 in
dividends and $100,000 in interest income. How much of this investment income will be taxable to the trust?
A.
$0.
B.
$100,000 in interest income.
C.
$100,000 in interest income and $250,000 in dividends.
D.
$500,000 in capital gains.
Feedback: The open-end trust structure enables the fund itself to avoid taxation. Any interest, dividends or capital gains income, net of
fees and expenses, is passed on directly to the unitholders. The fund itself does not incur any tax liability. Any income that has flowed
through to the unitholder is taxed in the hands of the unitholder and the tax is based on the type of income that the fund generated.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
42.Which of the following represents the total of all expenses charged to a mutual fund, excluding trading or brokerage costs?
A.
Management expense ratio (MER).
B.
Load.
C.
Management fee.
D.
Trailer fee.
Feedback: The load refers to the sales commission charged to a mutual fund on the purchase of an open-end fund. The trailer fee is a fee
paid to the distributor of the mutual fund for providing ongoing services to the holder of the fund, including investment advice, tax guidance,
financial statements, etc. The management fee is the fee paid to a fund manager for managing the fund. The management expense ratio
(MER) represents the total of all management fees and other expenses charged to the fund. However, the MER does not include trading or
brokerage costs.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
43.What does a mutual fund’s management expense ratio (MER) represent?
1.
2.
3.
4.
Total of all management fees and other expenses charged to a fund.
Percentage of the fund’s weekly average net asset value (NAV).
Total annual cost of running the fund, excluding trading or brokerage costs.
Reciprocal of the trading expense ratio (TER).
A.
1 and 3.
B.
1 and 2.
C.
2 and 4.
D.
3 and 4.
Feedback: The management expense ratio (MER) is the total annual cost of running a fund. It includes the management fees that are paid
annually to the fund manager.
Reference | Chapter 17: Mutual Funds: Structure and Regulation
Learning Domain | Mutual Funds
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44.An investor sets up a mutual fund ratio withdrawal plan that will pay him 10% of the end-of-year value of his mutual funds. At the beginning
of this year, his mutual fund portfolio is worth $150,000. At the end of this year, his portfolio increased by 15%. How much will the investor
receive from his ratio withdrawal plan at the end of this year, assuming no deferred sales charges apply?
A.
$17,250.
B.
$15,000.
C.
$24,750.
D.
$37,500.
Feedback: The value of portfolio at the end of the year is $172, 500 ($150,000 x 115%)
The amount received at the end of this year is $17,250 ($172,500 x 10%).
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
45.The most recent one-week performance period of XYZ Money Market Fund appears in the following table:
Change from
Change from
Fund
Current Yield Effective Yield
Previous Day
Previous Week
XYZ Money Market
2.06
2.10
-.02
-.03
What is XYZ's annualized rate of return?
A.
2.06%.
B.
2.03%.
C.
2.08%.
D.
2.10%.
Feedback: The performance of money market funds is presented somewhat differently. Because of the relatively fixed net asset value per
share (NAVPS) that these funds maintain, business newspapers do not bother to report the NAVPS, but rather report each fund’s current
and effective yield. The current yield reports the fund’s rate of return over the most recent seven-day period, expressed as an annualized
percentage.
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
46.What are the withdrawal requirements of a mutual fund fixed-period withdrawal plan?
A.
Specified amount withdrawn over a predetermined period to exhaust capital when the plan ends.
B.
Specified percentage of the holdings must be withdrawn each year.
C.
Specified dollar amount must be withdrawn on a monthly or quarterly basis.
D.
Specified percentage of the holdings must be withdrawn based on the fund’s investment
performance.
Feedback: In a fixed-period withdrawal plan, a specified amount is withdrawn over a predetermined period of time with the intent that all
capital be exhausted when the plan ends.
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
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47.Which type of mutual fund withdrawal plan has a specified amount withdrawn over a predetermined time frame so that all capital will be
exhausted when the plan ends?
A.
Fixed-period withdrawal plan.
B.
Life expectancy-adjusted withdrawal plan.
C.
Ratio withdrawal plan.
D.
Systematic withdrawal plan.
Feedback: In a fixed-period withdrawal plan, a specified amount is withdrawn over a predetermined period of time with the intent that all
capital will be exhausted when the plan ends.
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
48.Which fund best suits a Canadian risk-averse investor with a time horizon of six months?
A.
Canadian money market fund.
B.
Asset allocation fund.
C.
Canadian income balanced fund.
D.
U.S. money market fund.
Feedback: The least risky and most liquid of mutual funds is the money market fund. In this example, the Canadian money market fund
would be more appropriate, as it avoids foreign exchange risk.
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
49.An investor with a life expectancy-adjusted withdrawal fund has an actuarially determined life expectancy of 85 years. She begins the plan
at age 70, with all withdrawals taking place at the beginning of the year. At the end of Year 2, the fund has a value of $560,000. How much
can she withdraw in Year 3?.
A.
$43,076.92.
B.
$37,333.33.
C.
$46,666.67.
D.
$50,909.09.
Feedback: The amount withdrawn on each occurrence is based on periods of time, which are continually readjusted to the changing life
expectancy of the plan holder, taken from mortality tables. Thus, the amounts withdrawn vary in relation to the amount of capital remaining
in the plan and the plan holder's revised life expectancy. In this example, the investor would receive a withdrawal of $560,000 / [85 – (70 +
(3 – 1))] = $43,076.92.
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
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50.Sindi, aged 30, wants the simplest method of ensuring that her mutual fund assets match her time horizon as time passes and she
approaches retirement years. Which fund investment should her advisor discuss with Sindi?
A.
Target date fund.
B.
Specialty fund.
C.
Index fund.
D.
Commodity fund.
Feedback: Target date funds (also called target-based funds or life-cycle funds) are structured on the assumption that risk tolerance
declines as investors grow older.
Reference | Chapter 18: Mutual Funds: Types and Features
Learning Domain | Mutual Funds
51.What is the underlying structure of a leveraged exchange-traded fund (ETF)?
A.
Derivatives.
B.
Commodities.
C.
Consumer debt.
D.
Covered calls.
Feedback: An inverse-leveraged ETF makes use of derivatives (typically swap contracts).
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
52.Jamal is investing in a covered call exchange-traded fund (ETF). Which factors should he consider before making his decision?
1.
2.
3.
4.
Is the manager restricted to using only at-the-money or out-of-the money options?
Are the options American or European?
Does the ETF provide fixed or variable payments?
Do the futures trade in a liquid market?
A.
1 and 3.
B.
2 and 3.
C.
2 and 4.
D.
1 and 4.
Feedback: Depending on the mandate of the product, there can be constraints on the portfolio manager that reflect the type of strategy the
product is focusing on. For example, the manager may be constrained to using only at-the-money or out-of-the-money approaches, as well
as percentage written. A fixed payment provides a consistent cash flow to the investor but can at times deplete capital if the sources of the
fund’s yield (dividends and option premium) are not sufficient to cover the payment. A variable payment preserves principal, but payments
can vary significantly, depending on market conditions and the strategy executed. It is usually preferable to avoid depleting principal over
time, so investors should look for managed covered call strategies that pay a sustainable distribution.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
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53.What is the single biggest risk of a standard exchange-traded fund (ETF)?
A.
Market risk.
B.
Short-selling bans.
C.
Roll yield loss.
D.
Front-running.
Feedback: Since most ETFs are designed to replicate the results of a market index, the biggest risk an ETF faces is systematic or market
risk.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
54.Gurkirat is trying to decide whether to buy an index mutual fund or a standard exchange-traded fund (ETF). What are the advantages of
mutual funds over ETFs for Gurkirat?
1.
2.
3.
4.
Distributions must be paid, not reinvested.
Partial shares can be purchased.
Trade at a discount.
Lower minimum investment.
A.
2 and 4.
B.
1 and 2.
C.
1 and 3.
D.
3 and 4.
Feedback: Mutual funds can buy and sell partial units, and so a regular dollar value can be easily set. They can be acquired for as little as
$500.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
55.Which exchange-traded fund (ETF) has the highest use of derivatives?
A.
Leveraged ETF.
B.
Standard ETF.
C.
Index-based ETF.
D.
Rules-based ETF.
Feedback: Leveraged ETFs use derivatives, such as swaps, to achieve the leveraged return effect.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
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56.What are the risks of securities lending for an exchange-traded fund (ETF) provider?
1.
2.
3.
4.
Creditworthiness of the money market securities.
Default risk of the share borrower.
Using a third-party lending agent.
Retaining a portion of the lending revenue.
A.
1 and 2.
B.
2 and 3.
C.
3 and 4.
D.
1 and 4.
Feedback: The risk of securities lending comes from the creditworthiness of the money market securities bought and received, and the
default risk of the share borrower. In 2007 and 2008, a liquidity crisis in the credit markets emerged as seemingly solid bond issuers
defaulted on their obligations. To avoid their own liquidity crises, ETFs should set minimum credit guidelines for the short-term securities
that ultimately serve as collateral.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
57.Baljot wishes to buy a type of exchange-traded product that trades on the exchange but does not experience tracking error. Which product
would be suitable?
A.
Exchange-traded note (ETN).
B.
Standard exchange-traded fund (ETF).
C.
Inverse exchange-traded fund (ETF).
D.
Index mutual fund.
Feedback: Exchange-traded notes (ETNs) do not have tracking error risk because of the following guarantee: the bank issuing them
promises to pay a return based on the underlying asset.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
58.What are the characteristics of exchange-traded funds (ETFs) in Canada?
1.
2.
3.
4.
Can only be sold by individuals registered with IIROC.
Listed and traded on stock exchanges.
Can be purchased on margin.
Higher management costs than mutual funds.
A.
2 and 3.
B.
1 and 3.
C.
2 and 4.
D.
1 and 4.
Feedback: ETFs are structured as open-ended mutual fund trusts that trade on a stock exchange. They typically have lower management
fees than mutual funds.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
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59.What is the difference between a Fund Facts document and an Exchange-Traded Fund (ETF) Facts document?
A.
ETF Facts document must provide information about trading and pricing characteristics.
B.
Fund Facts document must provide information about the risks of mutual funds.
C.
ETF Facts document must provide information about the ETF’s front-end and back-end loads.
D.
Fund Facts document must provide information about why mutual funds trade at discount to the
net asset value (NAV).
Feedback: ETFs must produce and file a summary disclosure document called ETF Facts. This document is designed to look like the
Fund Facts document that accompanies a mutual fund. However, ETFs differ from mutual funds in some key ways, which the ETF Facts
must reflect. In addition to the standard information presented in a Fund Facts document, the ETF Facts document must address the
trading and pricing characteristics of ETFs.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
60.Dorota has received several distributions from an exchange-traded fund (ETF) that she owns, but is confused about the tax implications of
distributions. Which type of ETF distribution is tax-free?
A.
Return on invested capital (ROIC).
B.
Interest.
C.
Dividends.
D.
Capital gains.
Feedback: In some cases, an ETF may distribute an amount that is not taxable to the investors, such as a return on invested capital
(ROIC). However, such a distribution decreases the adjusted cost base of the investor’s units.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
61.Which features of exchange-traded funds (ETFs) make them attractive to the retail investor?,ol type="1">
Transparency.
Liquidity.
Continuous distribution.
Customization.
A.
1 and 2.
B.
1 and 3.
C.
2 and 4.
D.
3 and 4.
Feedback: ETFs are transparent and liquid investments that are considered to be tax efficient. They are not customizable from a retail
investor’s perspective.
Reference | Chapter 19: Exchange-Traded Funds
Learning Domain | Exchange-Traded Funds
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62.A hedge fund has a hurdle rate of 3% and no high-water mark. Under which circumstances will the hedge fund’s manager receive an
incentive fee?
A.
Return on the fund greater than 3%.
B.
Non-market-related return on the fund greater than 3%.
C.
Return on the fund greater than 3% over the risk-free rate.
D.
Return on the fund greater than its benchmark return plus 3%.
Feedback: A hurdle rate is the rate that a hedge fund must earn before its manager is paid an incentive fee. For example, if a fund has a
hurdle rate of 5%, and the fund earns 20% for the year, incentive fees will be based only on the 15% return above the hurdle rate, subject
to any high-water mark. Hurdle rates are usually based on short-term interest rates.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
63.Which type of closed-end fund has the right to periodically buy back its outstanding shares?
A.
Interval fund.
B.
Business income trust.
C.
Private equity fund.
D.
Real Estate Investment Trust (REIT).
Feedback: Closed-end funds that have the flexibility to buy back their outstanding shares periodically are known as interval funds or
closed-end discretionary funds.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
64.Mario opted to reset his $75,000 investment in a 100% guaranteed segregated fund after five years, when its market value was $84,000.
Ten years after the reset date, his segregated fund policy matured at a market value of $91,000 and Mario redeemed the contract. How
much capital gain did Mario incur?
A.
$16,000.00
B.
$7,000.00
C.
$8,000.00
D.
$9,000.00
Feedback: No capital gains liability is triggered at the time of reset. However, at the time of redemption (which is 15 years after the original
deposit), the capital gain of $16,000 ($91,000, which was the proceeds at redemption less the original cost of $75,000) is taxable in the
year in which the policy is paid out.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
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65.How far back from the date of bankruptcy could a creditor challenge a segregated fund purchase if the investor was legally insolvent at the
time of purchase?
A.
Five years.
B.
One year.
C.
10 years.
D.
20 years.
Feedback: Under the federal Bankruptcy and Insolvency Act, the proceeds of a segregated fund may be subject to seizure if it can be
proven that the purchase was made within a certain period before the bankruptcy – normally within one year. But if the client was legally
insolvent when the contract was purchased, the segregated fund purchases could be challenged as far as five years back.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
66.A hedge fund has a hurdle rate of 4% and an annual return of 18%. What is the percentage that the fund manager's incentive fee will be
based on?
A.
14%.
B.
4%.
C.
18%.
D.
22%.
Feedback: A hurdle rate is the rate that a hedge fund must earn before its manager is paid an incentive fee. In this example, if a fund has a
hurdle rate of 4%, and the fund earns 18% for the year, incentive fees will be based only on the 14% return above the hurdle rate, subject
to any high-water mark. Chapter 20: Other Managed Products.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
67.BB Inc. is a private equity firm. It identified an opportunity to apply its management skills through the purchase of a large poorly managed
family business. The purchase was financed with both equity and debt. Which type of financing method did BB Inc. use to close the deal?
A.
Leveraged buyout.
B.
Turnaround.
C.
Growth capital.
D.
Distressed debt.
Feedback: A leveraged buyout is the acquisition of companies financed with equity and debt. Buyouts are one of the most commonly used
forms of private equity.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
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68.Which organization is responsible for ensuring that federally regulated insurance companies are adequately capitalized?
A.
Office of the Superintendent of Financial Institutions (OSFI).
B.
Assuris.
C.
Canadian Life and Health Insurance Agency (CLHIA).
D.
Canada Revenue Agency (CRA).
Feedback: The Office of the Superintendent of Financial Institutions (OSFI) is responsible for ensuring that federally regulated insurance
companies are adequately capitalized under the requirements of the federal Insurance Companies Act.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
69.Which type of investment fund should be avoided if a client wants in-depth and current information on their investment?
A.
Hedge fund.
B.
Open-end mutual fund.
C.
Exchange-traded fund (ETF).
D.
Segregated fund.
Feedback: As hedge funds are generally offered as private placements, they are not required by securities laws to provide the
comprehensive initial and ongoing information associated with securities offered through a prospectus. This lack of transparency may
create a situation in which hedge fund investors may not always know how their money is being invested.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
70.How are capital gains distributions received by investors in closed-end mutual funds?
A.
Paid directly to investors.
B.
As reductions in management fees and expenses.
C.
Paid as distributions of units with no change to the adjusted cost base.
D.
Reinvested in additional units.
Feedback: Because the number of units of a closed-end fund is generally fixed, capital gains, dividends and interest distributions are paid
directly to investors rather than reinvested in additional units.
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
71.What is one of the estate planning advantages of segregated funds?
A.
Opportunity to avoid probate.
B.
Contract holder and beneficiary may be the same person.
C.
Annuitant and beneficiary may be the same person.
D.
Estate taxes are not payable until the end of the year following death.
Feedback: One of the key estate planning advantages of segregated funds is the opportunity to avoid probate (the legal process of
administering the estate of a deceased person).
Reference | Chapter 20: Other Managed Products
Learning Domain | Other Managed and Structured Products
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72.What is the most important factor to consider about the principal guarantee of a principal-protected note (PPN)?
A.
Creditworthiness of the bank issuing the PPN.
B.
Volatility of the underlying securities in the PPN.
C.
Participation rate of the PPN.
D.
Default risk of the underlying zero-coupon bond.
Feedback: As the issuers of PPNs, the banks guarantee the return of principal at maturity. The value of the guarantee is based wholly on
the issuer’s perceived creditworthiness. In the event of default, PPN investors rank equally with all other investors in the bank’s deposit
notes.
Reference | Chapter 21: Structured Products
Learning Domain | Other Managed and Structured Products
73.Which structured product is most suitable for a client with a low risk tolerance requiring income?
A.
National Housing Act (NHA) mortgage-backed securities (MBS).
B.
Asset-backed commercial paper.
C.
Principal-protected notes.
D.
Split shares.
Feedback: Investors buy National Housing Act (NHA) mortgage-backed securities (MBS) because it effectively places their money in real
estate (in the form of mortgages) without facing the risk of default (with the benefit of Canada Mortgage and Housing Corporation’s
guarantee), or the problems of collections and credit appraisal.
Reference | Chapter 21: Structured Products
Learning Domain | Other Managed and Structured Products
74.Why do many investors sell their principal-protected notes (PPNs) prior to maturity?
A.
To take advantage of capital gains taxation.
B.
To ensure liquidity.
C.
To avoid a decline in value.
D.
To avoid maturity fees.
Feedback: Issuers of principal-protected notes (PPNs) in Canada may facilitate a secondary market. If the PPN is sold at a profit on that
market, the profit is taxed as a capital gain. If it is sold at a loss, the loss is considered to be a capital loss for tax purposes. Consequently,
many investors sell or redeem their PPNs prior to maturity to take advantage of capital gains taxation. Otherwise, they are taxed at the
marginal rate applied to interest income.
Reference | Chapter 21: Structured Products
Learning Domain | Other Managed and Structured Products
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75.From lowest to highest, how would you rank the different components of split shares in terms of expected volatility?
A.
Split preferred shares, the underlying stock and split capital shares.
B.
Split preferred shares, split capital shares and the underlying stock.
C.
The underlying stock, split preferred shares and split capital shares.
D.
The underlying stock, split capital shares and split preferred shares.
Feedback: Capital shares are a leveraged investment in a portfolio of underlying common shares, and are therefore volatile. A study of
price volatility (reported by Scotia Capital) revealed that capital shares tend to be significantly more volatile than the common shares held
in the underlying portfolio, and therefore carry more risk. Capital shares also hold much more risk than preferred shares for the following
two reasons: 1. They are ranked after preferred shares in priority, in the event that the split share corporation is wound up. 2.They are not
paid until after obligations to preferred holders, along with other liabilities, are paid.
Reference | Chapter 21: Structured Products
Learning Domain | Other Managed and Structured Products
76.How much earned income must you have in the current year to contribute to a TFSA?
A.
$0.00
B.
$5,500.00
C.
$10,000.00
D.
$15,000.00
Feedback: You do not have to have earned any income in the preceding or current year to be able to contribute to a TFSA. The money
you contribute can come from a tax refund, a bequest, savings, a gift, or earnings from employment or business. Any resident of Canada
who is at least 18 years old can contribute to a TFSA.
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
77.When must an RRSP be deregistered?
A.
Calendar year in which the RRSP plan holder reaches age 71.
B.
Calendar year in which the RRSP plan holder reaches age 65.
C.
Calendar year in which the RRSP plan holder reaches age 80.
D.
Calendar year in which the RRSP plan holder retires.
Feedback: An RRSP holder may make withdrawals or deregister the plan at any time, but the mandatory deregistration of an RRSP is
required during the calendar year when an plan holder reaches age 71.
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
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78.Jaleel purchases 300 shares of XYZ at $20 on September of Year 1, 200 more shares of XYZ at $22 in February of Year 2 and 400 more
shares at $25 of XYZ in August of Year 2. He sells 300 shares in October of Year 2 at $30, and all of the remaining shares in January of
Year 3 at $29. What is the approximate adjusted cost base (ACB) of the shares sold in Year 3, ignoring all additional trading costs and
commissions?
A.
$13,600.00
B.
$11,400.00
C.
$17,400.00
D.
$20,400.00
Feedback: The first group of shares have an adjusted cost base (ACB) of $6,000 (300 x $20). The second group have an ACB of $4,400
(200 x $22). The final group has an ACB of $10,000 (400 x $25). The total ACB is $20,400 ($6,000 + $4,400 + $10,000). The average cost
per share is $22.67 ($20,400 / 900). Following the sale in October, 600 shares remain, with a cost base of $13,600 (22.67 x 600).
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
79.An investor purchases a $1,000 five-year bond for $960. At the end of the calendar year, the investor notices that the bond is now trading
at $980. What are the tax consequences for the investor of this change in value?
A.
There is no amount taxable.
B.
Investor must report a capital gain of $20.
C.
Investor must report interest earnings of $20.
D.
Investor must report interest earnings of $40.
Feedback: A capital gain or loss is calculated only at the time of disposition, and is based solely on the difference between the proceeds of
the disposition and the adjusted cost base (book value) of the security. You are not required to declare capital gains or losses annually,
unlike interest income from a bond.
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
80.An investor takes out a loan from his bank to contribute to his RRSP. How would his advisor explain the tax status of the interest paid on
the loan?
A.
Not tax deductible, as it is used to earn tax-exempt investment income.
B.
Not tax deductible, as the investor has a legal obligation to pay the interest.
C.
Tax deductible, as the loan’s purpose is to earn retirement income.
D.
Tax deductible, as the loan is an arm's length transaction.
Feedback: Interest paid on funds borrowed to contribute to an RRSP, an RESP, an RDSP or a TFSA, is not tax deductible because the
borrowed funds are used to earn investment income that is tax-exempted.
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
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81.An investor sells 300 shares of PQR Company, with an adjusted cost base (ACB) of $6,000, for net proceeds of $4,500. Two weeks later,
the investor purchases 300 shares of PQR Company for $5,000. The investor continues to hold the shares 30 days later. How will the loss
on the disposition of the shares be reported for income tax purposes?
A.
Investor cannot report a capital loss.
B.
Investor will report a capital loss of $1,000.
C.
Investor will report a capital loss of $1,500.
D.
Investor will report a capital loss of $500.
Feedback: Taken together, these transactions are an example of a superficial loss. Superficial losses are not tax deductible. They occur
when securities sold at a loss are repurchased within 30 calendar days before or after the sale, and are still held at the end of 30 days after
the sale. The amount of the superficial loss – $1,500 in the example above – is added to the adjusted cost base (book value) of the
repurchased shares.
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
82.How much, rounded to the nearest dollar, would be the federal tax payable on a $1,000 dividend received from a Canadian company for
an investor in a 26% federal tax bracket?
A.
$152.00
B.
$207.00
C.
$260.00
D.
$359.00
Feedback: Federal tax is calculated on the grossed-up amount of dividends received ($1,000 × 1.38). The tax payable is then reduced by
the amount of the dividend tax credit or ($1,380 × 0.1502). In this example, the federal tax is $358.80 [0.26 × ($1,000 × 1.38)]. The dividend
tax credit is $207.28 ($1,380 × 0.1502). The federal tax payable is $151.52 ($358.80 – $207.28).
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
83.What is a characteristic of a defined contribution pension plan?
A.
Retirement benefits depend on how contributions were invested.
B.
Only employee contributions are tax deductible.
C.
Contributions are based on employee's previous year's earned income.
D.
Retirement benefits are known in advance and based on years of service.
Feedback: In a defined contribution plan, the contributions to the plan are predetermined and the benefits, at retirement, will depend on
how the contributions were invested.
Reference | Chapter 22: Canadian Taxation
Learning Domain | Canadian Taxation
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84.Which type of fee-based account ranks highest in terms of its degree of customization?
A.
Separately managed accounts.
B.
Exchange-traded fund wraps.
C.
Mutual fund wraps.
D.
Single manager accounts.
Feedback: In separately managed accounts, clients are able to tailor their holdings because they are held separate from other clients’
investments. The client can opt for a portfolio management service where the model of investments is held directly by the individual
investor.
Reference | Chapter 23: Fee-Based Accounts
Learning Domain | Fee-Based Accounts and Working with the Retail Client
85.Vanit tells her financial advisor Shanika that the pharmaceutical company where she works is about to be taken over by a U.S.-based drug
firm. Shanika returns to the office and tells her manager and a few colleagues that this takeover is about to happen. Which action did
Shanika take that violates a standard of conduct?
A.
Not keeping material non-public information confidential.
B.
Not exercising independent judgment.
C.
Not encouraging others to conduct business in a professional manner.
D.
Not disclosing these details to her research department.
Feedback: If an advisor acquires non-public material information, the information must neither be communicated (outside of the
relationship) nor acted upon. Employees of a firm’s trading, corporate finance or research departments must be aware of the need to
safeguard non-public confidential material information received in the normal course of business.
Reference | Chapter 24: Working with the Retail Client
Learning Domain | Fee-Based Accounts and Working with the Retail Client
86.Hari, an investment advisor, is leaving the office on Monday for a doctor's appointment. He advises his assistant, who is not registered as
an advisor, that if Nick Karan calls about an order he and Hari had discussed earlier that day, she is to take down the client order and input
it into the firm's trading system. Which standard of conduct is Dwayne violating?
A.
Trades by registered and approved individuals.
B.
Client orders.
C.
Complete and accurate information relayed to the client.
D.
Due diligence.
Feedback: Trades by registered and approved individuals means that all trades and all acts related to trades, whether with existing or
potential clients, must be made only by people who are registered and approved under applicable legislation and the rules of selfregulatory organizations (SRO). Dwayne’s assistant is not registered, which means his actions are in breach of this regulation.
Reference | Chapter 24: Working with the Retail Client
Learning Domain | Fee-Based Accounts and Working with the Retail Client
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87.Drew, a financial advisor with Elite Financial, has been dealing with Victoria, a risk-averse client, for several years. Recently, Varusha has
been getting tips from her brother-in-law on high-risk tech stocks to buy and she decides to invest. Drew executes her trade requests
without providing any advice to Varusha. Which standard of conduct has Drew violated?
A.
Duty of care.
B.
Integrity.
C.
Professionalism.
D.
Confidentiality.
Feedback: Drew has violated the standard of conduct of duty of care, which addresses unsolicited orders. An unsolicited order is an order
entered by a client that was not recommended by the investment advisor or anyone at the advisor’s firm. In giving advice to clients, an
advisor must provide appropriate cautionary advice with respect to unsolicited orders that appear unsuitable based on the client’s profile.
Under the standard of conduct of duty of care, the advisor must be aware of the objectives and strategies behind each order accepted on
behalf of their clients, whether it is solicited or not.
Reference | Chapter 24: Working with the Retail Client
Learning Domain | Fee-Based Accounts and Working with the Retail Client
88.Max requests that his client provide him with copies of her most recent bank statements, investment account statements and tax returns.
Which step in the financial planning process are Max and his client completing?
A.
Collecting data and information.
B.
Establishing the client-advisor relationship.
C.
Analyzing data and information.
D.
Conducting a periodic review and follow-up.
Feedback: In the collecting data and information step, the advisor must collect information that will allow for a complete understanding of
the client’s personal financial status. This would include statements and information about the client’s asset position, as well as an
understanding of the client’s tax situation.
Reference | Chapter 24: Working with the Retail Client
Learning Domain | Fee-Based Accounts and Working with the Retail Client
89.What is the stage of the life cycle hypothesis where tax minimization is an investment objective and a shift to equity funds is likely to
occur?
A.
Mature earning years.
B.
Early earning years.
C.
Family commitment years.
D.
Nearing retirement.
Feedback: In the mature earning years, the asset allocation is likely to shift back toward a higher weighting in equity funds. One reason for
the shift is the need to minimize taxes, given that these clients are often in the highest marginal bracket.
Reference | Chapter 24: Working with the Retail Client
Learning Domain | Fee-Based Accounts and Working with the Retail Client
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90.Which trading system is designed to prevent human errors in security trading, settlement and record-keeping activities?
A.
Straight-through processing.
B.
Trade matching.
C.
Block trading.
D.
High-frequency trading.
Feedback: The straight-through processing system is designed to prevent human errors associated with security trading, settlement and
record-keeping activities. It ensures that only security transactions that meet all applicable regulations and investment guidelines and
restrictions are permitted to be executed.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
91.Which equity investment strategy usually results in the lowest portfolio turnover?
A.
Value.
B.
Sector rotation.
C.
Market timing.
D.
Growth.
Feedback: Value: A bottom-up, value-oriented portfolio manager would look for undervalued securities with little focus on overall economic
and market conditions. They should be prepared to wait many years to recognize a stock’s full value. This somewhat passive style results
in a relatively low portfolio turnover.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
92.What is the name for a bundled package of equity trade-related services offered by investment dealers to special clients such as hedge
fund managers?
A.
Prime brokerage.
B.
Dark pool.
C.
Axe sheet.
D.
Direct market access.
Feedback: Prime brokerage is a bundling of equity trading-related services used primarily by hedge funds.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
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93.What is the role of the custodian in the trade process?
A.
Verifying trade details and settlement instructions against available securities or funds.
B.
Reporting and confirming trade details to the manager and clearing agency.
C.
Advising the dealer on how the traded securities are to be allocated to the manager’s clients.
D.
Issuing customer trade confirmations.
Feedback: The custodian verifies the trade details and settlement instructions against available securities or funds held for the institutional
investor.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
94.What does the buy-side of the institutional marketplace refer to?
A.
Investors.
B.
Investment dealers.
C.
An active investment style.
D.
Institutional market makers.
Feedback: The buy-side refers to investors, both institutional and retail, whereas the term sell-side refers to dealers in the business of
selling securities and other services to investors.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
95.Which type of investment style is considered an active bond investment strategy?
A.
Interest rate anticipation.
B.
Immunization.
C.
Indexing.
D.
Sector rotation.
Feedback: Interest rate anticipation: With this strategy, the manager moves funds from one end of the yield curve to the other in
anticipation of interest rate changes. If interest rates are expected to fall, extending the portfolio’s duration will be profitable. Conversely, if
interest rates rise, the portfolio will benefit from a shift to a shorter portfolio duration.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
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96.Which type of investment dealer focuses primarily on small- to mid-size clients who prefer to be in charge of managing and trading their
own investment portfolios?
A.
Self-directed dealers.
B.
High-frequency trader shops.
C.
Full-service dealers.
D.
Investment banking boutiques.
Feedback: Discount dealers focus primarily on offering secondary equity trading services for small- to mid-size individual investors who
prefer to manage and trade their own equity portfolio. Their service offering involves fast, user-friendly equity trading via both internetbased and telephone-based communication platforms.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
97.How are accounts usually divided among institutional salespersons?
1.
2.
3.
4.
By geographical area.
By suitability requirements.
By relationship.
By account size.
A.
1 and 3.
B.
1 and 2.
C.
2 and 4.
D.
3 and 4.
Feedback: Accounts among salespeople are typically divided as follows:
By geographical area: Dealers segregate accounts by geographical area to make it logistically simpler for their salespeople to visit
clients.
By account type: Dealers categorize accounts into two types: fundamental and hedge/arbitrage. Fundamental accounts belong to longonly money managers. To get the managers business, the salesperson has to emphasize the dealer’s intellectual resources and ability
to generate money-making ideas that will help the manager s overall business. Hedge/arbitrage accounts are more like trading
accounts and tend to be more interested in money-making ideas.
By relationship: Some dealers allocate accounts to those salespersons with whom the client has the best relationship.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
98.What would be a reason for an institutional client to request a soft-dollar arrangement with their dealer?
A.
Avoidance of separate invoicing for investment research costs.
B.
Reducing commission costs.
C.
Method of payment for block trades.
D.
Facilitating purchase of fixed-income transactions.
Feedback: In a soft-dollar arrangement, an institutional client purchases goods or services through commission dollars, rather than
through an invoice. For example, an institutional client may pay for investment research performed by a dealer agreeing to channel some
trading business through the dealer in an amount equal to the amount charged for the service.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
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99.What do you call the verification process of matching security buy and sell trade orders between two institutional firms?
A.
Clearing.
B.
Origination.
C.
Settlement.
D.
Soft-dollar arrangement.
Feedback: Clearing is the process of confirming and matching security trade details.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
100.Which type of investment fund originates from public donations and puts the money to work in helping generate income for charitable
organizations and their ongoing deliverables?
A.
Endowment fund.
B.
Hedge fund.
C.
Pension fund.
D.
Fund of funds.
Feedback: An endowment is a pool of assets created from gifts and donations for the purpose of creating income to help an organization
achieve its specific goals.
Reference | Chapter 25: Working with the Institutional Client
Learning Domain | Working with the Institutional Client
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