Chapter 22 Other Managed Products RQ Flashcards
If the reset value is higher than the net asset value of the fund at death, how is the 100% death benefit offered by a segregated fund calculated?
A. The value of the original investment.
B. The difference between the reset value and the net asset value of the fund at death.
C. The difference between the net asset value of the fund at death and the original investment.
D. The difference between the reset value and the original investment.
B. The difference between the reset value and the net asset value of the fund at death.
The basic principle behind the death benefits offered by a segregated fund is that the contract holder’s beneficiary or estate is guaranteed to receive payouts amounting to at least the original investment of the contract holder. The basic amount of the death benefit is equal to the difference, if any, between the net asset value of the fund at death and the original amounts invested. If the contract has been reset, the death benefit is the difference between the reset value and the net asset value of the fund. For example, if the original investment was $100,000, the fund was reset at $140,000 but the net asset value of the fund at death was $130,000, the death benefit would be the difference between the reset value and the net asset value of the fund ($140,000 - $130,000 = $10,000).
How are segregated funds able to offer creditor protection?
A. They are deemed to be owned by the beneficiary.
B. They are deemed to be owned by the annuitant.
C. They are held in registered plans.
D. They are insurance policies.
D. They are insurance policies.
Segregated funds may offer protection from creditors that is not available through other forms of managed investment products such as mutual funds. Creditor protection stems from the fact that segregated funds are insurance policies. As such, ownership of the fund’s assets resides with the insurance company rather than the contract holder. Insurance proceeds generally fall outside of bankruptcy legislation.
In the event of default of one of its members, what protection does Assuris provide to segregated fund holders?
A. Assuris guarantees the value of the assets held in the fund.
B. Assuris guarantees commitments of contracts at the time of default if there is an irrevocable beneficiary named.
C. Assuris guarantees death and maturity benefits to a maximum of $60,000 or 85% of the promised guaranteed amount, whichever is higher.
D. Assuris guarantees death and maturity benefits for Canadian residents only.
C. Assuris guarantees death and maturity benefits to a maximum of $60,000 or 85% of the promised guaranteed amount, whichever is higher.
The Assuris guarantee covers only the death benefits and maturity guarantees applicable to a segregated fund contract. The assets of the funds themselves are not eligible for Assuris protection because they are segregated from the general assets of the insurance company. As such, segregated fund holders enjoy a built-in form of protection against an insurance company’s insolvency. Assuris’ role is to “top up” any payments made by a liquidator to fulfill the insurance obligations under a segregated fund contract. The Assuris guarantee applies only in the event of death or at the end of the contract term. In all other instances, there is no guarantee.
Martha redeems a segregated fund that she purchased 12 years ago with a 100% guarantee. The adjusted cost base of the fund is $50,000, while the market value of the policy at maturity is $40,000. Which of the following statements about the taxation of Martha’s segregated fund is true?
A. The capital gain is fully offset by the capital loss incurred.
B. The maturity guarantee is not taxable.
C. The maturity guarantee of $10,000 is fully taxable as interest income.
D. Only $5,000 of the capital gain is taxable.
A. The capital gain is fully offset by the capital loss incurred.
Payments from a segregated fund contract’s maturity guarantees are taxable. The amount of tax payable depends on whether the proceeds, minus any sales charges, exceed the cost of the contract. The cost of the contract, known as the adjusted cost base, consists of the original amounts deposited and any net income or capital gains (or capital losses) allocated to the policy. If the proceeds of the contract (after commissions) are less than the adjusted cost base, income tax is payable on the guaranteed amount. However, the contract holder can use the difference between the market value of the segregated fund and the adjusted cost base as a capital loss.
What condition must exist for a segregated fund contract to be eligible for creditor protection?
A. The fund must offer a 100% maturity guarantee.
B. The contract must be registered.
C. A beneficiary must be named.
D. The annuitant must be the contract holder.
C. A beneficiary must be named.
In order for the assets held in the contract to be eligible for creditor protection, a few conditions must be met. The purchase must not be made with the intention of avoiding potential creditor action, and a beneficiary must be named.
What is a characteristic of the beneficiary requirements for a segregated fund?
A. Irrevocable designation allows beneficiary to appoint successor annuitant.
B. Beneficiary must be a legal person.
C. Contract holder may designate his or her estate as the beneficiary.
D. Contract holder must have insurable interest to beneficiary.
C. Contract holder may designate his or her estate as the beneficiary.
The contract holder may designate one or more beneficiaries, or may designate his or her estate as the beneficiary.
What is the tax effect for capital gains and losses in segregated funds that are flowed to investors?
A. Segregated capital losses flowed to investors cannot only be used to offset prior year’s capital gains.
B. Segregated fund capital losses and capital gains can be passed on to the contract holder.
C. Capital losses flowed to segregated fund holders can only be used to offset other segregated fund capital gains.
D. Segregated fund capital gains are taxable as ordinary investment income.
B. Segregated fund capital losses and capital gains can be passed on to the contract holder.
One of the advantages of segregated fund contracts over mutual funds is that both capital losses and capital gains can be passed on to the contract holder.
What percentage of Real Estate Investment Trusts (REIT) is typically paid out to the investors?
A. 0%.
B. 50%.
C. 95%.
D. 100%.
C. 95%.
REITs generally pay out a high percentage of their income—typically 95%—to their unitholders.
How do closed-end funds differ from open-end funds?
A. Closed-end funds are listed for trading on a stock exchange.
B. Closed-end funds always trade at NAVPS.
C. Closed-end funds have a schedule of declining redemption fees.
D. Closed-end funds are more liquid than open-end funds.
A. Closed-end funds are listed for trading on a stock exchange.
Once issued, closed-end fund units are listed for trading on a stock exchange, unlike open-end funds that are bought and sold through a distributor. Closed-end funds can trade at a discount, at par, or at a premium relative to the combined net asset value of their underlying holdings. Closed-end funds are less liquid than open-end funds. Investors are charged commissions for the purchase or sale of the funds.
What is a disadvantage of investing in listed private equity companies?
A. More regulatory and reporting requirements than other listed companies.
B. Need to participate actively in management of invested companies.
C. Requirement for insider information.
D. Lack of liquidity in underlying investments.
D. Lack of liquidity in underlying investments.
Listed companies trade like common shares and are subject to the same regulatory and reporting requirements as other publicly traded companies. they have the benefit of access to a much greater depth of information on possible investments. However, lack of liquidity is one of the key disadvantages that private equity investors face.
Identify a disadvantage of closed-end funds.
A. Closed-end funds provide only for automatic reinvestment of distributions.
B. All closed-end funds have front-end load charges.
C. Closed-end funds are less liquid than open-end funds.
D. Dividends from these funds are not eligible for the dividend tax credit.
C. Closed-end funds are less liquid than open-end funds.
Closed-end funds are less liquid than open-end funds. The fund does not usually issue or redeem units; therefore, buyers and sellers must be found in the open market.
Identify the correct statement regarding taxation of income trusts.
A. If all income is paid to unitholders, there is no taxation of the income trust.
B. An income trust does not have to pay tax as it is a legal trust.
C. Income trusts are taxed at a higher rate than other Canadian companies.
D. Income trusts are taxed like that of taxable Canadian corporations with the exception of REITs.
D. Income trusts are taxed like that of taxable Canadian corporations with the exception of REITs.
The tax treatment of income trusts is like that of taxable Canadian corporations. The income trust pays tax, and the distributions from the trust are taxed in the hands of the investor, as are dividends received from a corporation. However, it is important to note that Canadian REITs have different taxation rules. REITs can avoid paying tax by distributing the income generated by the trust directly to unitholders. The revenue generated by the REIT is therefore taxed in the hands of investors.
Identify a type of asset that could be found in a business income trust.
A. Restaurants.
B. Seniors’ housing.
C. Condos.
D. Shopping malls.
A. Restaurants.
Business income trusts purchase the assets of an underlying company, usually in the manufacturing, retail, or service industry. The companies may operate in such diverse areas as peat moss extraction, restaurants, industrial appliances, canning, and distribution.
ABC Inc. is a small, publicly listed company that is having difficulty obtaining capital to finance its expansion. Select the exchange-traded investment vehicle that offers an opportunity for ABC to acquire the funds.
A. Income Trust.
B. Leveraged ETF.
C. Listed private equity firm.
D. Royalty Trust.
C. Listed private equity firm.
A listed private equity company is an investment company that uses its capital to purchase or invest in a wide range of other companies. The shares of a listed private equity company are publicly traded on a stock exchange. Investment holdings could include companies that are publicly traded on a stock exchange or are privately held (a privately held company does not trade on a stock exchange). These companies can provide financing to firms unwilling or unable to find capital using public means.
Select the additional risks REITs face by investing in real estate properties.
Reinvestment risk Quality of the properties Foreign exchange risk Access to liquidity A. 1 and 3. B. 1 and 4. C. 2 and 3. D. 2 and 4.
D. 2 and 4.
REITs face many of the risks typical of real estate investments:
Quality of the properties
State of the rental markets and tenant leases
Costs of debt financing
Natural disasters and access to liquidity.
When interest rates rise, REIT trading values may fall – higher borrowing costs make the purchase of new properties less profitable. Reinvestment risk is generally associated with regular interest income from debt investments. REITs earn income from their investments in real estate and do not pay regular interest to investors, so reinvestment risk does not apply in this case.
