17 - What are the different types of investment?

Question 1

What are the 5 categories of investments and give examples of each category?

Answer 1

1. Cash (GICs, Term Deposits)
2. Debt Instruments (CSBs, Treasury bills, bonds)
3. Equity Instruments (PS, CS)
4. Managed Instruments (Mutual Funds, Segregated Funds)
5. Annuities (pays blend of interest, capital, & investment income)

Question 2

What are the 3 different types of provincial savings bonds?

Answer 2

1. Step-up (interest increases over time)
2. Variable rate (interest varies)
3. Fixed-rate (interest fixed)

Question 3

What is the difference between a “participating dividend” and a “common share dividend?”

Answer 3

Participating dividends pay both preferred dividend and common share dividend. Common share dividends only pay the common share portion.

Question 4

What is a Future?

Answer 4

A contract that involve a commitment to buy or sell a specific quantity of an asset at a specific price, for delivery during a specific period of time.

Question 5

What is an Option?

Answer 5

A contractual right or obligation to buy or sell a specific quantity of a security at a specific price within a stipulated time period.

Question 6

What is a Warrant?

Answer 6

A certificate that grant the holder the opportunity to buy shares in a company at a stated price over a specific period.

Question 7

What is a Forward?

Answer 7

An agreement to buy or sell an asset at a specified point in the future at a price specified on the date that the agreement is made.

Question 8

How is the NAV of a mutual fund calculated?

Answer 8

NAV = (Net assets of portfolio - liabilities of the fund)/(Number of units outstanding)

Question 9

What is the right of withdrawal or redemption?

Answer 9

The right of the unitholder of a mutual fund to withdraw their investment by submitting their units to the fund.

Question 10

How are mutual funds taxed?

Answer 10

Non-registered plans - yearly
Registered plans - when funds withdrawn
N.B. Interest and dividends are automatically reinvested in registered plans

Question 11

What is a segregated fund?

Answer 11

A pool of funds held by an insurance company (separate from other assets).

Question 12

What is the maturity guarantee?

Answer 12

Guarantees that at least 75% of deposits 10 years after the date of the contract will be returned to the investor.

Question 13

What is the death benefit guarantee?

Answer 13

Guarantees at least 75% of the deposits will be returned to the beneficiary should the owner die during the contract.

Question 14

What is a deposit-based guarantee?

Answer 14

Guarantees at least 75% of each deposit will be returned 10 years from the deposit date.

Question 15

What is a policy-based guarantee?

Answer 15

Guarantees at least 75% of each deposit will be returned 10 years from December 31 of the year in which the deposit was made.

Question 16

What is a contract-based guarantee?

Answer 16

Guarantees at least 75% of all deposits will be returned 10 years from the beginning of the contract.

Question 17

What is the difference between the contract annuitant and the contract beneficiary?

Answer 17

Contract annuitant is the person who will receive the proceeds of the contract when it matures (after 10 years).
Contract beneficiary is the person who will receive the amounts payable if the annuitant dies during the contract.

Question 18

How does value grow in a mutual fund?

Answer 18

The number of units increases and the price per unit decreases (with a net gain to the investor).

Question 19

How does value grow in a segregated fund?

Answer 19

The number of units stays the same and the price per unit increases.

Question 20

What is the linear reduction method?

Answer 20

Reduces the value of the maturity and death-benefit guarantees by the dollar amount withdrawn.

Question 21

What is the proportional reduction method?

Answer 21

Reduces the value of the maturity and death-benefit guarantees by the proportion of units withdrawn.

Question 22

What is the segregated fund investor profile?

Answer 22

1. Risk averse
2. Unrestricted by age
3. Have sufficient financial resources
4. Entrepreneurs, small business owners, corporate directors, professionals
5. Investors over 55 who need estate-preservation benefits
6. Poor health

Question 23

When are the 5 causes of tax issues regarding segregated funds?

Answer 23

1. Annually
2. On the maturity guarantee
3. Death Benefit Guarantee
4. Registered Contracts
5. Non-registered Contracts

Question 24

What are the annual tax issues for segregated funds?

Answer 24

Growth is dispersed to each contract holder during allocation (both gains and losses passed on).
Sales charges can be claimed as capital loss upon surrender/maturity.
Interest cost of borrowed money to invest can also be deducted.

Question 25

What are the tax issues regarding the maturity guarantee for segregated funds?

Answer 25

Capital gains tax payable on the amount that the proceeds are greater than the ACB.

Question 26

What are the tax issues regarding the Death Benefit Guarantee for segregated funds?

Answer 26

Capital gains tax payable on the amount that the contract value exceeds the guarantee.

Question 27

What are the tax issues related to Registered Contracts?

Answer 27

RRSPs must be terminated at age 71 and taxed at MTR unless it is rolled over into an RRIF.
Pay tax at the MTR when the funds are withdrawn.

Question 28

What are the tax issues related to Non-registered Contracts?

Answer 28

Must pay tax on the annual allocations.

Can claim dividend tax credits & capital losses.

Question 29

What are the different types of annuities?

Answer 29

1. Term-certain annuity

2. Life annuity

Question 30

What are the two ways market value adjustment is calculated?

Answer 30

1. Interest rate credited to the premium is changed to the rate that would have applied for the number of years of the annuity.
2. Interest rate credited may be changed as a result of changes in interest rates.

Question 31

What is a structured settlement annuity?

Answer 31

Used by insurers to settle large accident & liability claims that result in serious permanent disability.