Chapter 11: Conservative Mutual Fund Products

Question 1

Money Market Mutual Funds

Answer 1

• Short-term Securities
  -Highly Liquid fixed income investment
• 364 days or less that are readily convertible to cash
• Low or no Default Risk
  -Backed by Government
• Very little interest rate risk
  Short maturities or
  duration
• Low Volatility
• Low Returns

Question 2

Two Difference distinguishing Money Market securities

Answer 2

1) Not Insured by the Canadian Deposit Insurance Corporation (CDIC) or any other insurer
2) May fluctuate in value with changes in short-term interest rates

Question 3

Money Market funds usually contain

Answer 3

Government T-bills

Commercial papers and Bankers Acceptance

Question 4

Seven day yeild calculation

Answer 4

(Ending NAV / Initial NAV) - 1

Question 5

Mortgage Mutual Fund

Answer 5

• Fixed income / income category
• Can generate Capital Gains
• In-between money market funds and bond funds
• Backed by Creditworthy individuals not goverment
• Low Default and Interest rate risk, because of highly diversified portfolios (10,000 to 15,000 individual mortgages)

Question 6

Conventional Mortgage

Answer 6

A mortgage for less than 80% of the value of the property

Question 7

High Ratio Mortgage

Answer 7

A mortgage for more than 80% of the value of the property

Question 8

Mortgage Funds contain

Answer 8

Residential Mortgages

Commercial Mortgages

Question 9

Mortgage Fund Objective

Answer 9

To earn fixed income while at the same timepreserving capital. There is a small potential for capital gains.

Question 10

2 risks for Mortgage funds

Answer 10

Default risk from mortgages (but coverage under the National Housing Act (NHA) does provide insurance on the individual mortgages in the fund)

Interest rate risk (higher than money market funds,lower than bond funds)

Question 11

Returns on Mortgage Funds

Answer 11

Interest & Capital Gains

Quarterly and often monthly distributions

Expected to be low but higher than money market funds

Question 12

Bond Funds

Answer 12

• Riskier than Mortgage funds, less riskier than Balanced funds
• Fixed income fund
• Contain Corporate (better yield, higher risk) and Government Bonds
• Duration 90 days to a year

Question 13

Bond Fund Objective

Answer 13

provide current income, capital preservation and some potential for capital gains.

Question 14

Concept of Duration

Answer 14

Express sensitivity of bonds to a change in interest rates.

Mutual Fund Manager
-Increase or shorten the portfolio duration

Mutual fund representative
-Compare the sensitivity of different bond funds
– the higher the duration, the higher the fund’s volatility.

Question 15

Short-Term Bond Funds

Answer 15

• Part Bond fund, part Money Market fund

Question 16

Short-term Bond Objective

Answer 16

To Preserve Capital and generate income
- Some capital gain potential
- "aggressive money market fund"
- Large percentage of investments in money market securities and the rest in canadian and provincial government bonds
-

Question 17

Preferred Dividend Funds

Answer 17

• contains Preferred and Common Shares

- dividend income is taxed lower than interest income due to dividend tax credit

Question 18

Preferred Dividend Funds objective

Answer 18

earning income from dividends and maintain capital preservation

Question 19

Preferred dividend fund Risks

Answer 19

default risk, interest rate risk and market risk