CH.1 Investment and savings Flashcards
1
Q
Concept of investing
A
• Investing: money used to make more money
• Investors invest sum (principal/capital) that is repaid + profit
○ Profit= return
2
Q
Compound interest
A
earning interest on investment
○ Interest reinvested
○ Interest on interest= compound interest
○ Very effective over long period of time
3
Q
Types of Investment returns (3-PNN)
A
○ 3 types of return:
§ Positive and reflect profit earned
§ Neutral- investor receives sum already invested
§ Negative- investor loses money
4
Q
Rate of return
A
return expressed as % of amt invested
5
Q
Scale of risk
A
tells investor how likely it is he will get all money back
§ Low risk investment: more certain will get back all money invested
§ Speculative risk: most risky, uncertain if will get money back, possibility of very high returns
6
Q
returns classified as:
A
§ Nominal: stated/advertised rate
Real return: nominal return - rate of return
7
Q
Asset classes
A
○ 3 main asset classes: § Stocks (equities) § Bonds (fixed income/debt § Cash (money market instruments) ○ Each class has own risk/return features
8
Q
Diversification
A
manages risk
○ Combines asset classes–> lowers investment risk,. Higher returns
9
Q
Liquidity
A
how easily investment can be converted to cash
○ Or how easily asset/investment can be sold w/o decrease in value
○ Illiquid= NOT liquid
§ i.e. real estate
10
Q
Presnt value:
- definition
- when to calculate
- formula
A
goes backwards from future date ○ How much money needed NOW to reach savings goal ○ Calculated when: § FV known § Future date known § Rate between today and future known
PV= FV / (1 + interest rate)n
11
Q
Future Value
A
value of current investment @ future date, given interest earned on investment
○ How much will sum of money TODAY be worth in future
○ Calculate when:
§ PV known
§ Future date known
§ Rate between today and future known
FV= PV X (1 + interest rate)n
12
Q
Investment objectives
A
investors reasons for investing/saving
13
Q
Investment objectives classified as:
A
○ Short term: less than 3 yrs.
○ Medium term: 3-10 years
○ Long term: 10 years or more
14
Q
Tax advantaged Investing
A
• Interest taxed at same rate as income from working
• Dividends from stock of qualified cdn co.
○ Gets dividend tax credit
• Capital Gains: taxed at rate lower than interest
15
Q
Types of Investments-11
A
- seg funds
- annuities
- stocks
- bonds
- savings account
- GIC’s
- mutual funds
- ETF’s
- real estate
- CPB’s/CSB’s
- group plans
16
Q
Segreated funds
- where to buy
- risk
- protection
A
• Only sold through life ins agents and brokers
- money pooled in fund
- maturity and death benefit guarantee
low risk- max loss 25% (100-75)
protected by assuris up to limit
17
Q
seg funds advantages/disadvanatges
A
Advantages • Maturity and DB guaranteed • Designate beneficiary + bypass probate • Tax benefit when CL incurred • Investors protection (Assuris)
Disadvantages
• Sales charges ongoin
18
Q
Annuities
A
- reliable source of income
- annuitant that receives income pmts
- fixed rate
-pmt determined by Prevailing interest rate at time invested
* Primary risk-- interest rate risk-- b/c fixed * Inflation risk- if not indexed
protected by assuris
19
Q
Annuity advantages/disadvantages
A
Advantages • Easy to understand • Steady income stream • 2 forms: • Variable • Indexed • Choose pmt frequency • Investor protection of ins annuity contract--> Assuris
Disadvantages
• NOT flexible
• Interest rate risk- b/c doesn’t rise/fall with rates
• Penalties if surrender/withdrawal
20
Q
Stocks
A
- preferred
- common
buy on toronto stock exchg
returns in form of:
○ CG
○ Dividends
○ CL
risks: • Blue chip= least risk • Penny stocks= most risk • Market risk • Industry risk • Risk of loss of capital/principal (total loss)
Protected by CIPF
21
Q
Stock advantages/disadvantages
A
Advantages
- High degree of transparency in stock market investing
- Dividends
- Favourable tax rates for CG/CL
Disadvantages
- Possibility of loss (even total loss)
- Possible absence of diversification= more risk
- Liquidity- if need to be sold, may be at lower price
- No beneficiary
- No creditor proofing
- No ability to rescind sale
22
Q
bonds
A
• Bonds are debt investment (must be repaid)
○ Borrower (issuer
○ Lender (investor)
also called fixed inciome security
issuers:
- government
- corporations
• Issuer guarantees repayment of bond + regular interest pmt
buy through IIROC nad MFDA market dealers
types: cdn government bonds -gov of cda, provincial, municipal Foreign bonds eurobond
risks: • Interest rate risk • Reinvestment risk • Inflation risk • Credit risk • Liquidity risk • Currency risk
protected by CIPF
23
Q
Bonds advantages/disadvanatges
A
Advantages
• Repayment of principal + interest pmts guaranteed
disadvantages??
24
Q
Savings accounts general infor + adv/disadv
A
advantages:
• Immediately available cash that benefits from interest
• Money can be withdrawn
Disadv:
Low interest rates– inflation risk
• Exposed to inflation risk
Investor protection by
• CDIC- up to $100,000
25
• 2 basic types:
○ Traditional: low interest rate, lower fees + no restrictions on withdrawals
○ High interest savings accts: higher rates , withdrawals restricted
• 2 basic types:
○ Traditional: low interest rate, lower fees + no restrictions on withdrawals
○ High interest savings accts: higher rates , withdrawals restricted
26
GIC's
= Term, deposit
* Issuer guarantees investor will receive principal + promised rate @ maturity
* Guaranteed return of principal + interest at stated
* Interest rate risk (b/c low)
* Inflation risk (b/c rises, may rise above interest rate)
Investor protection
• CDIC- up to $100,000, 5yrs or less maturity
• Assuris- for Insurance GIC's
27
GIC adv/disadv
Advantages:
• Guaranteed return of principal + interest
• Variety of products
• Convenient., easy
Disadv:
• Low rates of return
Significant penalties if withdraw
28
Types of GIC's
- Fixed Interest GIC
- Cashable/redeemable GIC
- Escalating GIC
- Variable Interest GIC
- Market linked GIC
- Insurance GIC's
29
Fixed Interest GIC
○ Specific interest rate
§ Simple interest paid annually
§ Interest that compounds annually, paid at maturity
30
Cashable/Redeemable GIC
○ Allows early cashing out
"cost"= lower interest rate
31
Escalating GIC
○ Increases interest rates on anniversary
Can cash out all/some at anniversary
32
Variable Interest rate GIC
Rate increases over time
33
Market Linked GIC
○ Links portion of return to performance of specific equity market index
○ Not cashable before maturity
34
Insurance GIC
CHK BOOK
35
```
Mutual Funds:
DEFINITION
guarantees
NAV + NAVPU
Portectd by?
```
• Investors money pooled in to fund (like Seg funds)
either:
open ended or closed
* No guarantees on mutual funds
* Returns based on Net asset Value (NAV)= TOTAL NET ASSET VALUE OF FUND / # O/S UNITS
• NAVPU= (FUND ASSETS- FUND LIABIITIES)/ # o/s units
protected by
CIPF
MFDA
TO MAX $1 MILLION
36
Type of mutual funds adn risks
```
○ Cash- incl funds in money market
○ Fixed income
○ Equity
○ Commodity
○ Other
```
risks:
○ Cash based funds: interest rate and inflation risk
○ Equity Funds: Market Risk and industry risk
○ Fixed Income funds: Interest rate risk
37
Mutual Fund Distributions
earnings generated in fund + CG from buying/selling securities
38
Exchange Traded Funds (ETF's)
definition
Guarantees
protection
* ETF's- investors buy shares in fund
* Fund represents all components of a chosen index or multiple indexes
* Value of ETF based on index/indexes
• No guarantees for ETF's
○ Difference in return btwn actual index and ETF
Investor Protection
• CIPF
39
ETF adv/disadv
```
advantages:
• Diversification
• Convenience
• Transparent
• Lower MER
• Professional mgmt
• No penalties
```
Disadv:
??
40
Types of ETF's
• Currency, industry, commodity, dividends, real estate
41
Seg funds specialized by
• Specialized by:
○ Asset class
○ Real estate and commodities
○ Geographically
* may combine asset classes-- > balanced funds
* may invest in other Seg funds--> funds of funds
42
Seg fund returns
• Return based on fund performance, Stated as %
• Returns earned as interest, dividends, foreign income, CG
-registeed accts- returns not taxed
NON registered acct- returns taxed
43
Real estate Adv/Disadv
```
adv:
• Diversification
• Steady rental income
• CG on sale
can be used as collateral
```
Disadv:
• Need down pmt
Evidence of financial stability/strength
• Value subject to market
44
Real estate returns
* No guarantees
* Return in form of rental Income
* CG on sale
45
Real estate risks
* Liquidity risk
* Market risk
* Interest rate risk
NO INVESTOR PROTECTION
46
Canada premium bonds (CPBs) and Canada Savings Bonds (CSB's)
- DEFINITION
- RETURNS
- RISKS
* 2 types of savings bonds from gov
* Represents debt
* Principal and interest guaranteed
* CPB's pay higher rate, but CSB pays monthly
* Interest rate risk
* Inflation risk
47
cpb/csb ADV/DISADV
ADV:
• Least risk
• Can be cashed out anytime
Valuable employee benefit
DISADV:
Rate very low
48
where to buy CPB/CSB
• CPB: directly from Gov. or financial institution
○ 2 month starting in October
• CSB's: through job payroll savings plan
○ oct-nov 1
49
Group Plans types
* Defined benefit Pension Plan (DBPP)
* Defined Contributions Pension Plan (DCPP)
* Group registered retirement savings plan (GRRSP)
* Deferred Profit sharing Plan (DPSP)
* Tax free savings acct (TFSA)
* Pooled Registered Pension plan (PRPP)
50
Group plan adv/disadv
??
51
Economic risk
possibility investment will be affected by macroeconomic factors
○ Cannot be managed by individual investor
52
Infaltion risk
- purchasing power risk
| - if rate lower than inflation = LOSS
53
Interest rate risk
• When investment that pays interest is tied to specific interest rate- can't take advantage of rate increase
-inheret in all investments
54
Market risk
• Risk total financial market will decline
55
Liquidity risk
• Risk investments can't be easily/quickly converted to cash
Risk cannot be sold without affecting value of asset/investment
56
Foreign Exchange risk
currency risk"
| • Risk in chg. in price from 1 currency against another
57
credit risk
* Aka "default risk"
| * Risk borrower will fail to repay loan
58
Industry risk
* Aka "default risk"
| * Risk borrower will fail to repay loan
59
what is meant by investment time horizon
refers to how long savings/investent period will be
60
What is currency risk
foreign exchange risk/currency risk: risk of incurring losses as result of unfavorable changes in exchg rates
61
advantages of group plan by employer
- help employer attract/retain good staff
- can be tailored to employer needs/wants
- employer is plan holder, can change plan frequently
- employer contributions tax deductible as business exp
62
can seg fund investor redeem investment prior to maturity?
yes, but with penalties
63
from what is the name "Individual Variable Insurance contract" derived
derived from fact that INDIVIDUAL is buying INSURANCE contract that has VARIABLE return
64
What is a protection fund?
?
65
what is interest rate risk
risk that rate will be too low, and wil not rise w/ inflation
66
what is a load fee
fee charged to investor for agent commissions
67
2 main types of equities: c/s and p/s- which one offers higher reward
Common shares
- unlimited potential for dividends
- share price increases
68
2 main types of equities: c/s and p/s- what are characteristics of P/S
- NO voting rights
- paid 1st before c/s (dividends)
- trade onpublic stock exchg
- FIXED annual dividend
- If liquidated- P/S get invested capital back before C/S
69
escalating GIC
- rate rises over time
- may allow investor to redeem all/part of deposit each anniversary w/ remaining amt invested, earning higher interest rate
70
investments categorized in 3 main categories- what are they
Main:
1. money market
2. fixed income
3. equity
Secondary:
4. real estate
5. commodities
71
what losses does protection fund cover
protects investor in event financial institution in vested in becomes insolvent
72
can bank sell life annuity
NO
| only life insurane company can
73
Various Protection funds, which industry is each following protection fund associated:
1. Assuris
2. CDIC
3. CPIF
ASSURIS: insurance, incl insurance GIC's
CDIC: Deposit taking insitutions (banks, trusts, etc)
CPIF: securities industry
74
2main risks of annuity
interest rate risk
| inflation risk
75
How are Seg funds grouped?
- asset class
- subsets of asset class
- combinations of asset classes
- geographically
76
what types of financial institutions can sell life annuity?
life ins companies
77
which offers higher coupon rate?
1. bond w/ shorter term?
2. Bond w/ longer term?
bond with longer term
- /c investors expect to be compensated for loaning money to insurer for longer period of time.
78
Advantages of investing in bonds
- wide range of bond issuers (gov/corp) + domestic/foreign-- can diversify
- purchased in varying terms- short term to long term
- repayment of principal + interest on government bonds virtually guaranteed
- barring default- investor receives regular interest payments + principal @ maturity
79
characteristics of C/S
- HAVE VOTING RIGHTS
| - unlimited dividends
80
Define equity investment
equity can be defined as ownership
| -own shares, own part of company
81
what is seg funds min guarantee @ death and @ 10 yr maturity?
75%
82
disadvantages of plan sponsor (employer) of group plan
- group RRSP contribution subject to payroll tax
| - may place financial constriants on employer- i.e req to fund DBPP
83
2 main types of equities: C/S and P/S: which type carries less investment risk?
preferred shares- because get their dividends 1st
84
how to calculate real return on investments
real return=
| nominal return - inflation
85
features of seg funds NOT offered with mutual funds
- maturity and death benefit guarantee
- bypass probate
- creditor proofing
86
liquidity risk
how fast asset can be converted to cash or how fast it can be converted to cash without decrease in value
87
why does canada premium bond pay higher rate than canada savings bond
b/c canada premiu bond id LESS liquid, + offers slightly higher interest rate (premium)
88
diversification
spreading/managing the risk across different asset classes (less risk = higher returns)
89
another name for foreign exchange risk
currency risk
90
where does name "segregated funds" come from
investments kept seperate by insurer
91
inflation risk
- purchasing power risk
- risk that rate will not rise with inflation, reduces the value
-if inflation exceeds rate of return, investor looses purchasing power
92
closed end mutual fund
fixed number shares issued
93
what is an annuity
series of payments
94
what is CDIC
- Canadian Deposit Insurance Co.
- protects investors depostis in deposit taking institutions (banks, trusts, etc...)
- max $100,000
- term of 5 years or less
95
What is investing
using money to make money
96
biggest risk bond investor faces
-credit risk/default risk
97
Least taxed to most taxed (C.D.I)
- CG
- DIVIDENDS
- INTEREST INCOME
98
How are bonds market value affected if rates fall?
-bond price increases b/c interest rates and market values of bonds move in opposit directions
99
does "no load: fund charge management fee?
YES
100
Insurance GIC
- Accumulation annuity
- pays fixed rate
- issued by insurance company
101
how soon must fund facts be given?
withing 2 days of purchase
102
how would it affect market value if interest rates rise
- bond price falls b/c interest rates and bond market values move in opposit directions
