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CFP Exam Prep > Investment Planning > Flashcards

Investment Planning Flashcards

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1
Q

What is the current securities regulatory framework in Canada?

A

The provincial securities regulators delegate certain aspects of securities regulation to self-regulatory organizations (SROs) such as the exchanges, the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA).

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2
Q

How to calculate bond T-bill yield?

A

Yield = (Par - Purchase Price)/Purchase Price x (365/Term) x 100

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3
Q

What is a corporate bond?

A

A debt certificate secured by a corporate asset.

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4
Q

What is a debenture?

A

An unsecured bond.

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5
Q

What is the default frequency of coupon payment unless stated otherwise?

A

Coupon is paid semi-annually.

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6
Q

How to calculate a mutual fund’s NAV?

A

NAV = (Fund Assets - Fund Expenses) / Number of Units issued

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7
Q

How to calculate a mutual fund’s offering price?

A

Offering price = NAV / (1 - Load)

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8
Q

How to calculate a mutual fund’s redemption value?

A

Redemption value = NAV x (1 - Load)

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9
Q

What does a segregated fund guarantee that mutual fund doesn’t?

A

Maturity guarantee, death guarantee, creditor proofing, probate protection and insurance protection.

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10
Q

What happens when a segregated fund loses its capital (investor doesn’t redeem)?

A

If a segregated fund loses capital in a given year, the unit holders can claim the capital loss on their taxes and offset any capital gains made on other investments. Mutual fund holders can only do so when selling mutual fund units at a loss.

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11
Q

How long can an investor apply a segregated fund’s capital loss?

A

3 years prior or forward forever.

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12
Q

What else is the difference between segregated fund and mutual fund?

A

Payment of distributions do not reduce the NAV of a Segregated fund the way distributions reduce the NAV of a traditional mutual fund.

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13
Q

What are 2 types of registered annuities (fully taxable)?

A
  • Registered Fixed Term-To-age 90

- Life annuity (available through a Life Insurance company only)

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14
Q

What are 2 types of non-registered annuities?

A
  • Non-Registered Fixed Term annuity (early tax is higher due to more interest being paid out)
  • Prescribed annuity (constant tax owing)
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15
Q

What are derivative securities?

A

Contingent contracts, meaning that the payoff to an investor is dependent or contingent upon some other action occurring (ie. a change in stock price or interest rates).

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16
Q

What is a call option?

A

The party that buys (or is long) a Call Option, has the right, but not the obligation, to BUY the underlying security at a specific price (the exercise price) anytime up to and including the expiration date.
The party that sells (or is short) a Call Option, has the obligation to SELL the underlying security at a specific price (the exercise price) anytime up to and including the expiration date.

17
Q

What is a put option?

A

The party that buys (or is long) a Put Option, has the right, but not the obligation, to SELL the underlying security at a specific price (the exercise price) anytime up to and including the expiration date.
The party that sells (or is short) a Put Option, has the obligation to BUY the underlying security at a specific price (the exercise price) anytime up to and including the expiration date

18
Q

What are forwards/futures contracts?

A

Futures and forwards are known as contracts of commitment. Both parties, the buyer and the seller, are committed to follow through according to the contract details.

19
Q

What is a relevant strategy to improve cash flow from using options?

A

Writing or selling options is considered a strategy to generate income for your portfolio. The income is equal to the premium received.
Buying Put options on securities you already own is a form of portfolio insurance, offering downside protection and upside potential

20
Q

What are the grossed-up and dividend tax credits for both eligible and ineligible dividends?

A

Eligible dividends: gross up 38% and DTC is 15.02%

Ineligible dividends: gross up 15% and DTC is 9.03%

21
Q

How are stock dividends and dividends reinvested are taxed?

A

Same way as cash dividend with grossed up amount and DTC.

Dividends paid by “non-Canadian” corporations are taxed as regular income.

22
Q

How is bond interest being taxed?

A

Annually even when it’s not received yet.

T-bill’s change in value is taxed as interest income.

23
Q

What is systematic risk?

A

Systematic Risk refers to system wide risk (or simply market risk) that affect all investors and all investments.
Measured by beta, can’t be diversified.

Examples: Global Marcroeconomic conditions, such as inflation fears

Pg 38

24
Q

What is bond duration?

A

Bond duration measures a bond price change relative to a change in interest rate.

25
Q

What is bond convexity?

A

Convexity measures the rate of price change.

26
Q

What is dollar-weighted return?

A

The dollar weighted return (DWR) is equivalent to the internal rate of return (IRR), measuring the actual return earned on a beginning portfolio value and on any net contributions made during the period, thus DWR is affected by cash flows to the portfolio.

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27
Q

What is time-weighted return?

A

Time weighted return (TWR) is equivalent to the annualized geometric return, it is unaffected by any cash flows to the portfolio; therefore, it measures the actual rate of return earned by the portfolio manager.

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28
Q

What is CAPM or Market Line Formula?

A

E(R) = Rf + B(Rm - Rf)

Rf = Risk free rate, Rm = Market Return, B = Beta

Pg 39

29
Q

What is weak form market hypothesis?

A

Current prices fully reflect all historical stock prices.

Pg 40

30
Q

What is semi-strong form market hypothesis?

A

Current prices fully reflect all publicly available information.

Pg 40

31
Q

What is strong form market hypothesis?

A

Current prices fully reflect both private an publicly available information.

Pg 40

32
Q

What are the 4 human errors when it comes to investing?

A
  • Forecasting errors: giving too much weight in recent experience
  • Overconfidence
  • Conservatism: slow in responding to news
  • Sample size neglect

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33
Q

What are the behavioral biases?

A
  • Framing: make decisions based on how things are “framed”.
  • Mental accounting: investor takes a lot of risk with one investment account but little risk with another account.
  • Regret avoidance: investors to blame themselves more for an unsuccessful unconventional investment than an unsuccessful conventional investment.
  • Prospect Theory (Loss Avoidance): investors are willing to take on more risk when they experience losses and take on less risk as they experience gains.
  • Illusion of control: investors think they can control how a stock performs in the future.
34
Q

What measures total risk?

A

Standard deviation (both systematic and unsystematic risk).

35
Q

How to calculate coefficient of variation?

A

Coefficient of variation = Standard Deviation/Mean

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