EXAM PRACTICE QUESTIONS

Question 1

Angelina purchased a bond with a $3,500 face value, bearing coupons with a 6% rate. How much interest will she receive on each of the two payment dates?

a) $115

b) $180

c) $210

d) $105

Answer 1

1. Calculate the amount that Angelina will receive annually by multiplying the face value by the coupon rate.
   3,500 × 6% = $210
2. Interest from a bond is usually paid semi-annually or two times a year. Divide the annual interest by 2 to find how much Angelina will receive in each payment.

$210 ÷ 2 = $105

Angelina will receive $105 on each of her payment dates or semi-annually.

[Study Reference: 1.3.4.4]

Question 2

Craig initially invested $12,000. His investment is now worth $15,500. Calculate Craig’s rate of return (rounded to nearest %).

a) 23%

b) 25%

c) 27%

d) 29%

Answer 2

1. Calculate Craig’s profit from his investment.

Current Value - Initial Value
$15,500 - $12,000 = $3,500 profit

2. Find Craig’s rate of return. Divide his profit by the initial value.

($3,500 ÷ $12,000) = 29% rate of return

Craig’s rate of return is 29%.

[STUDY REFERENCE: 1.1.2.2 Investment returns]

Question 3

Farah just passed her driving test and is planning to purchase her first car in 3 years. To cover all her car expenses, she will need $4,500. With a current annual interest rate of 3.75%, how much does Farah need to invest today to purchase her car?

a) $4,017.86

b) $2,048.25

c) $4,118.14

d) $3,998.19

Answer 3

To calculate how much money Farah needs to invest today, use the following formula: PV = FV ÷ (1+interest rate)n
where,
PV: present value
FV: future value
n: number of years

FV: 4500
n: 3
interest rate: 3.75
PV = 4500 ÷ (1+ 0.0375)3
PV = 4500 ÷ 1.12
PV = 4017.86

Farah will need to invest $4,017.86 now to purchase her car in 3 years.

[Study Reference: 1.1.3.1]

Question 4

Kayal is 65 years old and is a conservative investor. She is mostly concerned with longevity risk and wishes to receive a steady income for life. She also wants to manage her taxes as much as possible. Which investment is best suited for Kayal?

a) Annuity

b) Guaranteed interest account

c) Segregated bond fund

d) Segregated money market fund

Answer 4

Some advantages of annuities include:

• No worry about outliving one’s money when a life annuity or joint and last survivor annuity is purchased
• Steady income stream
  If the annuity is prescribed, less tax may be due in the early years of payment
• Only an annuity is guaranteed for life and can manage longevity risk.

[Ref: 1.3.2.1]

Question 5

Manny is semi-retired and is looking to retire fully within two years when he has enough savings. He wishes to invest in low-risk investments as he will need the funds post-retirement to meet his daily needs. Identify the most appropriate type of investment for Manny.

a) Equities

b) Exchange-traded funds

c) Bond Mutual Funds

d) Guaranteed Investments

Answer 5

Manny’s ability to earn an income from working is restricted due to being semi-retired, and he has a short time horizon (under 5 years). To preserve his capital for retirement, the most appropriate investment is guaranteed. By investing in a guaranteed investment, Manny will not risk the money that he has saved so far and will continue to increase its value through the guarantees.

Exchange-traded funds offer no guarantees to the capital invested.

Bond mutual funds are low risk, but not guaranteed, and Manny can’t risk any capital. Equity investments would be far too risky for Manny’s profile and time horizon.

[STUDY REFERENCE: 1.2.3 Need for guaranteed investments]

Question 6

What type of risk is real estate NOT exposed to?

a) Market Risk

b) Industry Risk

c) Liquidity Risk

d) Interest Rate Risk

Answer 6

Real estate is not exposed to industry risk as it is not based on a specific industry.
Real estate is exposed to market risk, liquidity risk, and interest rate risk:

Market risk results when there is a decline in the overall housing market.

Real estate is not easily bought and sold, it is exposed to liquidity risk as the owner may not be able to sell the asset for cash quickly. Where there is a mortgage, the owner is exposed to interest rate risk as mortgage rates fluctuate.

STUDY REFERENCE: 1.3.9.3 Returns and guarantees of real estate]

Question 7

Pavel has a $1,000 guaranteed investment certificate (GIC) with a rate of 2.7% that he purchased two years ago. The consumer price index (CPI) was 1.2% and 1.4% in the first and second years, respectively. How much did Pavel earn in interest, net of inflation?

a) $28

b) $13

c) $15

d) $27

Answer 7

Year 1: $1,000 x (2.7% – 1.2%) = $15
Year 2: $1,000 x (2.7% – 1.4%) = $13
Pavel has earned a total of $28 in interest, net of inflation.

Inflation is the increase in the cost of goods and services as measured by the consumer price index (CPI). Inflation is one of the factors in calculating the real return of an investment. Investment returns become more meaningful when inflation is factored in. The real return is calculated as nominal return minus inflation.

[Reference: 1.4.3]

Question 8

Which document outlines the key benefits, fees, and past performance of a segregated fund?

a) Prospectus

b) Fund Facts

c) Information folder

d) Segregated Fund Contract

Answer 8

The information folder is specific to segregated funds and outlines the key benefits, fees, and past performance.
A prospectus and Fund Facts document are specific to mutual funds.

A segregated fund contract is provided post-sale and outlines the terms of the agreement.

[STUDY REFERENCE: 1.3.1.2 [Where and how to buy segregated funds]

Question 9

Abam is constructing a portfolio of bonds and focusing on returns. All of the following factors would impact the return on Abam’s bonds, EXCEPT:

a) Face amount

b) Price

c) Credit quality

d) Maturity date

Answer 9

A bond issuer pledges to repay the face amount of the bond at maturity and to make interim interest payments to the investor. There are many factors that affect the return of a bond. They include:

• Interest (coupon) rate;
• Maturity date;
• Credit quality; and
• Price.

The face amount is not a factor that affects the return of the bond.

Ref: 1.3.4.4

Question 10

Louise recently inherited $5,000 and is looking for a passive investment for her inheritance.

Which of the following funds would be best for Louise?

a) An indexed ETF

b) A Corporate Bond

c) An Equity Mutual Fund

d) A Balanced Segregated Fund

Answer 10

The best option for Louise is an indexed ETF. This is a passive form of investment.

Passive investments mimic or copy the index they are tracking and produce returns that are very close to the mimicked index. Exchange-Traded Funds or ETFs are generally passive investments that follow an entire index like the Toronto Stock Exchange or a section of an index like the S&P/TSX Composite index.

Corporate bonds, equity mutual funds, and balanced segregated funds are not passive investments. While it is possible for mutual funds and segregated funds to be passive, in this case, neither fund option tracks an index.

[Study reference: 1.3.8 Exchange-Traded Funds]

Question 11

In the case of dealer insolvency, which organization provides protection for stock investors?

a) TSX

b) CIPF

c) IIROC

d) Assuris

Answer 11

For stock investors, the CIPF (the Canadian Investor Protection Fund) provides investor protection in the case of dealer insolvency.

The TSX does not provide any protection for its listed securities.

IIROC is the regulator but does not provide protection.

Assuris provides protection in the case of insolvent insurance companies, but not dealer insolvency.

[STUDY REFERENCE: 1.3.3.5 Investor protection]

Question 12

For which type of annuity is the total payment of the annuity NOT known at the time of purchase?

a) Life Annuity

b) Payout Annuity

c) Indexed Annuity

d) Term Certain Annuity

Answer 12

Life annuities, payout annuities, and term certain annuities all have a level, guaranteed payments for the life of the contract.

The indexed annuity has a payment amount that increases based on inflation over the contract term and is therefore unknown at the time of purchase. Despite the total future payout for an indexed annuity being unknown, they are attractive for investors: annuitants have a known minimum guaranteed payout and the assurance that their payments will fully or partially keep pace with inflation.

[STUDY REFERENCE: 1.3.2.4 Return and guarantees of annuities]

Question 13

Which statement best describes a passive style of investing?

a) Rebalancing the portfolio on a regular basis.

b) Rotating investments to sectors of the economy that are currently doing well.

c) The fund manager makes all investment decisions within the fund.

d) Keeping pace with the movement and returns of an underlying index.

Answer 13

A passive style of investing means that the fund is tracking an underlying index. As changes in stocks or bonds occur in the underlying index, the fund will replicate the changes so that the fund performance is close to the index.

Rotating investments between sectors is called a sector rotation strategy and calls for active management. When the manager makes the investment decisions and does not follow an underlying index, this is called active management – an investing style that is used by many mutual funds and segregated funds.

[STUDY REFERENCE: 1.3.8 Exchange-traded Funds (ETFs)]

Question 14

Markeem invested $56,000 in a mutual fund at the beginning of the year. At the end of the year, his investment value had grown to $58,800. What is his rate of return?

a) 100%

b) 75%

c) 5%

d) 50%

Answer 14

Markeem has a 5% rate of return on his mutual fund.
Rate of return = (market value - initial investment) ÷ initial investment
= (58,800-56,000) ÷ 56,000

= 5%

All of Markeem’s distributions or profits will be automatically reinvested into the fund.

Section Reference: 1.3.7.4

Question 15

Vuong borrows $30,000 from a private lender for improving his business. However, his business fails. Vuong immediately invests $20,000 which he had saved so far in a segregated funds contract to protect his money from the claims of the creditor. He names his wife as the irrevocable beneficiary. Which of the following is true in this case?

a) Vuong’s decision to invest in segregated funds is wrong, as they should primarily be acquired for investment purposes.

b) Vuong’s decision to invest in segregated funds is correct, as it is a secure way to protect his funds from creditor claims.

c) Vuong’s decision to invest in segregated funds is correct, as they are primarily acquired for the purpose of avoiding creditor claims.

d) Vuong’s decision to invest in segregated funds is wrong, because they do not protect contract owners from the claims of creditors.

Answer 15

When a person is owed money by another, that person or entity is a creditor.

A creditor may make a court claim for money owed if the borrower fails to make good on payment.

Segregated funds provide the potential for protecting contract owners from the claims of creditors.

They do so because they are insurance contracts and claims are not successful if the spouse, parent, children or grandchildren are named as beneficiary in the contract, if the beneficiary is irrevocable, or if the account is a registered account.

A person must not, however, try to avoid creditor claims by investing in a segregated fund.

For this reason, it is necessary for the segregated fund contract to be acquired for the purpose of investment, not for the purpose of avoiding creditors.

[Ref: 2.1.12]

Question 16

Neil is exploring his fund investment options and has been offered several options. He is interested in preferential tax treatment and is choosing his funds. Which of the following funds will help Neil be taxed at a lower rate?

a) Dividend funds

b) Mortgage funds

c) Income funds

d) Bond funds

Answer 16

Neil should invest in dividend funds from a Canadian corporation. Canadian corporations are taxed at a lower rate than interest income as a result of the dividend tax credit.

A dividend fund invests in companies that have a history of paying steady and rising dividends. A dividend is a distribution of a percentage of company profits by the Board of Directors to company shareholders. They are not guaranteed, but the obligation to meet dividend payments is taken very seriously by a company and its investors.

Mortgage Funds are invested in residential, commercial, and industrial mortgages. They provide an interest income and can be varying degrees of risk. When mortgages have a higher degree of risk because the underlying assets are riskier, mortgage funds are categorized as an “Other” asset class. Low-risk mortgage funds are a type of fixed-income funds. Default risk is associated with a mortgage fund. It is experienced when mortgage holders default on, i.e. fail to make their mortgage payments.

Income Funds: typically low-risk and hold bonds and high-quality stocks. Income can be capital gains, dividends and interest. Both government and corporate bonds can be held in income funds.

Bond funds: fixed-income funds that are generally low-risk with a low rate of return. There is an option to invest is a lower grade of bond fund that might have a higher return. Bonds are classified based on their duration: under 3.5 years is short-term, between 3.5 - 9 years is medium-term and over 9 years is long-term.

[Ref. 2.2]

Question 17

Manish invested $120,000 in a segregated fund with a 75% maturity and death benefit guarantee.

How much of Manish’s capital is at risk at maturity?

Answer 17

Unprotected investment = Initial amount invested × (100% − guarantee %)
$120,000 × 25% = $30,000

With 75% maturity and death benefit guarantees, 25% of the capital invested is still at risk. With an investment of $120,000, $30,000 is at risk and not protected.

[STUDY REFERENCE: 2.3.1 Risk to capital]

Question 18

Tamara had a personal emergency and needed to take out some money from her registered segregated fund. She asked her advisor to have $5,000 deposited into her personal account. What type of tax will the financial institution charge Tamara?

a) Withholding tax

b) Investment tax

c) Income tax

d) Capital gains tax

Answer 18

Tamara will be charged withholding tax by the financial institution. Withholding tax is held when a withdrawal is made from an RRSP or an RRIF. This tax is considered an advance against future tax owing.

Even though Tamara will not receive 100% of her withdrawal due to the withholding tax, the full amount of the withdrawal must be declared for tax purposes.

A reconciliation is made on the investor’s annual tax return that takes into account the tax already paid with the tax owing.

Tax is applied at the same rate as interest income.

Ref. 2.4.3

Question 19

Emerie has a $100,000 segregated fund with an MER of 3.2%. The value of her investment increased by 9.1% this year. What is the increase in Emerie’s investment?

a) $5,900

b) $3,200

c) $6,200

d) $9,100

Answer 19

To calculate Emerie’s return:
1. Subtract the MER from the increase in value.
9.1% - 3.2% = 5.9%

2. Multiply the result by the amount invested in the account.
   $100,000 × 5.9% = $5,900

Emerie’s segregated fund increased by 5.9% and his gain for the year is $5,900.

The MER or management expense ratio is a combination of operating expenses, the trailing commission and the costs for the guarantees of segregated funds. The MER is always charged regardless of market returns and so it is possible that a client might receive a negative return after the MER is subtracted from their annual return.

MERs reduce the amount the investor receives in their account.

[Study Reference: 2.3.3 Management Expense]

Question 20

When investing in segregated funds, the maturity date of the contract is typically 10 years from:

a) the date the contract was signed.

b) the date that the first deposit was made.

c) the date that the Information Folder was provided.

d) the third day after receiving the Segregated Fund contract.

Answer 20

The maturity date is at least 10 years from the date the first deposit (premium) is made to the insurer.

Within two days of receiving the Segregated Fund Contract, the investor has the right to rescind.

[STUDY REFERENCE: 2.1.1 Guarantees]

Question 21

Saleem’s segregated funds had a market value of $45,000 at the beginning of the year.

If the funds have an MER of 3%, and the return was -5%, calculate the value of Saleem’s investment.

a) $40,800

b) $41,400

c) $42,750

d) $44,100

Answer 21

The MER is charged regardless of market performance. If the fund lost 5%, and the fee was 3%, Saleem’s overall return was -8%. This loss would reduce his investment to $41,400 ($45,000 x 8% = 3,600).

[STUDY REFERENCE: 2.3.3 Management expense]

Question 22

Which of the following is responsible for classifying investment funds?

a) MFDA

b) CIFP

c) CIFSC

d) IIROC

Answer 22

The Canadian Investment Funds Standards Committee is responsible for classifying investments.
Its five asset classes are:

• Cash
• Fixed income
• Equity
• Commodity
• Other.

[STUDY REFERENCE: 2.2 Types of segregated funds]

Question 23

Carenza invested $2,300 in YNM Seg Fund Series A in her non-registered account. She was assigned 250 units. At the end of the year, a $200 allocation is made to her policy, and the unit value is adjusted due to fund growth.

She is issued a tax slip with $150 in interest and $50 in capital gains. If Carenza’s marginal tax rate is 34%, how much tax will she pay?

a) $59.50

b) $68.00

c) $34.00

d) $42.50

Answer 23

YNM Seg Fund Series A is in a non-registered account and Carenza will receive tax slips annually to account for the growth or decline in her investment.
To calculate Carenza’s taxes remember, interest income is taxed at 100% while capital gains are only taxed at 50%.

Interest income:
$150 × 34% = $51

Capital gains income:
$50 × 50% = $25
$25 × 34% =$8.50

Carenza’s Total Tax:
$51 + $8.50 = $59.50

[Study Reference: 2.1.4 Ease of monitoring value]

Question 24

lger invested $6,400 in a segregated fund with a 10-year, 75% maturity guarantee. He is currently 3 years into his contract and might need to withdraw his funds. The market value of his segregated fund is $4,650.

If Alger chooses to withdraw his money, how much will he receive?

a) $4,800

b) $4,650

c) $6,400

d) $4,480

Answer 24

Alger will receive the market value of his contract which is 4,650. The maturity guarantee only comes into effect at maturity and Alger is only 3 years into his contract. If he chooses to withdraw his money, he will receive the current market value.

If Alger waits until maturity and the value of his segregated fund has fallen below the 75% guarantee, he will receive the value of the guarantee. If the market value is higher, he will receive that instead. Therefore, on maturity, the policy owner never receives less than the maturity guarantee.

[Ref: 2.1.1.1]

Question 25

Identify the risk that would NOT be applicable when investing in a Global Equity Fund.

a) Political Risk

b) Currency Risk

c) Economic Risk

d) Purchasing Power Risk

Answer 25

Purchasing Power Risk is applicable when investing in bonds. This type of risk is present as a result of inflation eroding the return when investing in fixed income.
When investing in global equities, the investor is exposed to:

• political
• currency, and
• economic risk

Political volatility is a risk associated with investing outside of Canada and similar developed nations. Currency risk is another. An investor who seeks foreign opportunities should be well aware of the political situation and economic stability of the country or region in which he plans to invest. He should also monitor changes that might affect the investment, e.g., an election.

[STUDY REFERENCE: 2.2.12.2 Geographically specific funds]

Question 26

How are trailing commissions calculated?

a) As a percentage of the market value of the fund

b) As a fixed dollar amount per unit held

c) As a percentage of the initial premium amount

d) As a fixed dollar amount that increases over time

Answer 26

Trailing commissions are paid on a continuous basis for as long as the investor holds the funds. This is calculated as a percentage of the market value of the funds.

STUDY REFERENCE: 2.3.3 Management expense

Question 27

Phong is the policy owner of a $20,000 segregated funds contract with a 75% maturity and death benefit guarantee. His wife, Duyen, is the beneficiary of the contract. If Phong dies when the market value is $14,500, how much will be the top-up contributed by the insurer to the death benefit?

a) $500

b) $5,500

c) $1,000

d) $0

Answer 27

The top-up contributed by the insurer to the death benefit will be $500. Duyen receives the death benefit guarantee of $15,000 ($20,000 × 75%) which represents the market value of $14,500 plus a top-up of $500 ($15,000 – $14,500).

Ref: 2.1.1.2

Question 28

Which of the following should be categorized as a speciality fund?

a) Ethical fund

b) Mortgage fund

c) Real estate fund

d) Industry-specific fund

Answer 28

An ethical fund provides an alternative for investors who have specified preferences in what they invest in based on religious, political, or moral beliefs. Because of this mandate, an ethical fund would be considered a specialty fund. Mortgage funds, real estate funds, and industry-specific funds all have their own category.

STUDY REFERENCE: 2.2.12 Specialty funds

Question 29

Which of the following is a situation where probate fees will be charged as a result of the owner’s death?

a) Emma who owns a non-registered account and has gifted the funds to her daughter in her will.

b) Davis who received the proceeds of his spouse’s assets as her surviving spouse.

c) Spencer who owns a registered account and has named his mother as the beneficiary of his account.

d) Mandy who lives in Quebec and owns a non-registered account with no named beneficiary.

Answer 29

Probate fees are charged in all provinces, except Quebec, by the province of residence against the value of the deceased’s estate. Probate fees are paid before the estate can be distributed according to the deceased’s will. They can significantly reduce the amount of an estate.

Exceptions to probate fees include:

• Trusts
• Surviving spouse inheriting assets
• A segregated fund or insurance contract has a named beneficiary. The named beneficiary can be a spouse, parents, children, and grandchildren of the owner

If the estate is named the beneficiary of an insurance contract/segregated fund contract or there is no named beneficiary and the proceeds go to the estate, probate fees will be charged.

Since Emma owns a non-registered account and has gifted the funds to her daughter in her will, and not named her a beneficiary to the funds, probate fees apply to this situation.

[Ref. 2.1.11]

Question 30

Darinka purchases an insurance product and she receives a number of units based on her initial deposit. She chooses an investment mix of the TSX index fund based on the units’ value and selects only to increase income payments if they surpass a 3% rate of return. If the value of the units falls, the income falls. If the value of the units increases, the income increases. What type of insurance product does Darinka own?

a) Variable annuity

b) Variable universal Life

c) Non-par whole life

d) Indexed income annuity

Answer 30

Darinka owns a variable income annuity, which is an immediate life annuity that allows the annuitant the ability to earn returns that are linked to the market. The variable income is based on the annuity units, which are determined by the initial deposit made. The contract owner has the right to choose their own investment mix for the annuity unit(s) value, as well as the benchmark rate of return that determines if income payments would be increased.

Ref: 3.4.5