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CFP Prep - Hayley > Investment Planning > Flashcards

Investment Planning Flashcards

1
Q

How are exercised stock options treated for taxes?

A

Taxable benefit is realized when the options are exercised, because you are getting the shares at a price lower than market price. The taxable benefit is the difference between the exercise price you get the shares at versus the market price at the time you exercise the shares. YOUR ACB THEN BECOMES THE MARKET PRICE OF THE SHARES WHEN YOU EXERCISED THEM, NOT the exercise price.

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2
Q

When do you start re-paying the homebuyers HBP amount you withdrew?

A

In the 2nd calendar year after the initial withdrawal. (for purchases between 2022-2025 you start on 5th year).

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3
Q

Can you make HBP repayments in the first 60 days of the following calendar year like you can with RRSP CNs?

A

yes

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4
Q

How long do you pay HBP back for

A

15 years

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5
Q

What are the assumptions under Modern Portfolio Theory?

A

Market conditions are considered perfect, such that, investors expect similar returns, have similar time horizons and can borrow at the same risk-free rate

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6
Q

What is Modern Portfolio Theory

A

A mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk.

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7
Q

What is an index-linked GIC

A

interest is linked to performance of underlying index and paid at maturity. MUST hold it to maturity to get the interest.

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8
Q

What is one risk that is unique to emerging markets investing versus developed markets investing

A

Liquidity risk because EM often don’t have liquid markets so there is a risk you can’t sell your shares at market value

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9
Q

what are SRAs

A

securities regulatory authorities.Tasked in their province for securities regulation, overseeing securities markets, ensuring protection of investors.
Review and approve prospectuses, market surveillance, enforcing action against violators of securities law
Ensure public companies file accurate financial information.

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10
Q

what are the 4 purposes of SRAs

A

Investor protection
Fair access to markets
reduction of systemic risk
regulation of marketplaces within their jurisdiction

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11
Q

What is CSAs mandate

A

to harmonize and improve regulation of capital markets.

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12
Q

what are the steps to resolve a dispute in the securities industry

A
  1. file complaint with advisor/firm/dealer
  2. File complaint with Ombudsman for banking.investments (OBSI)
  3. file complaint with SRO like IIROC or MFDA
  4. File a complaint with a securities regulatory administrator (SRA)
  5. Take legal action like going to court. Usually a last resort
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13
Q

What is the market equilibrium

A

the price of a product where buyers and sellers are balanced, enabling anyone who wants to buy or sell the product to do so

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14
Q

Income approach GDP

A

adds up all income generated by economic activity (spending on goods and services)

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15
Q

Expenditure approach to GDP

A

adds up all consumer, business, gov’t spending during a certain period including business investments, exports, imports

GDP= Consumers + Business spending and investment + Government spending + (exports-imports)

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16
Q

5 phases of business cycle

A

Expansion, Peak, Contraction, Trough, Recovery

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17
Q

Characteristics of Expansion phase (business cycle)

A

stable inflation

Companies invest in new capacity to meet rising demand and avoid shortages

corp profits increase

more start ups than bankruptcies

strong stock markets

strong job creation,

steady or declining unemployment

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18
Q

Characteristics of Peak phase (market cycle)

A

marks the conclusion of expasion phase and start of contraction phase.

Demand exceeds economy’s capacity to supply it

labour and product scarcity leads to price and wage increases = inflation

interest rates rise to tame inflation, so bond prices fall and business investment shrinks

Sales of businesses decline resulting in build up of undesired inventory and reduced profits

stock prices start to from along with declining profits, stock market activity rises

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19
Q

Contraction phase characteristics (business cycle)

A

reduction in economic activity and maybe negative GDP (recession)

firms cut back on production, delay investment, decrease hiring/lay people off

business failures outpace start ups

decrease in employment erodes household income and consumer confidence

people spend less and save more

minimal activity in the stock market

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20
Q

Trough phase of the business cycle

A

falling demand and excess capacity impede firm’s and workers’ ability to demand higher prices and wages. Growth cycle reaches a trough, its lowest point.
Interest rates decline and bond prices rally inflation decreases
consumers who postponed purchases during contraction are encouraged by lower rates and start to spend
stocks start to rally

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21
Q

Recovery phase of business cycle

A

GDP recovers to peak
renewed interest in buying goods and services
firms have to increase supply to satisfy new demand
widespread layoffs come to an end
companies are not quite ready for large new investments
unemployment is still high but wage pressures are limited and inflation may continue to decrease.
**When economy surpasses its previous peak, another expansion phase has commenced

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22
Q

Leading indicators

A

housing starts
Manufacturers’ new orders
commodity prices
avg hours worked
stock prices
money supply

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23
Q

Coincident indicators

A

Personal Income
GDP
Industrial production
Retail sales

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24
Q

Lagging Indicators

A

Unemployment
Inflation rate
labour costs
Private sector plan and equipment spending
Business loans and interest on loans

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25
What is working age population
people 15+
26
who is in the labour force
employed people or those looking for work
27
labour participation rate
(labour force/working age population) X100
28
unemployment rate cacl
(people looking for work/labour force)X100
29
Underemployment
people who are working but in a job that is below their skill level. Leads to reduced productivity and lower standard of living for them
30
discouraged workers
people who have given up looking for work, retired early, returned to school. No longer included in labour force because they are not actively looking for work
31
types of unemployment
Cyclical - changes in business cycle Seasonal frictional - normal labour turnover Structural - from a skills gap or mistmatch between job vacancies and potential workers.
32
Natural unemployment rate
the lowest level unemployment can reach with out causing increased inflation. Economy thought to be fully utilized at this point.
33
Deflation
year-over-year decreases in inflation (negative inflation)
34
Disinflation
decline in the rate of inflation, still positive though
35
Result of disinflation
businesses and people might delay purchases in anticipation of lower prices which leads to slower economic growth and therefore increased unemployment
36
Balance of payments
statement that records a country's transactions with rest of world during certain period. Consists of Current account and Capital & Financial Account
37
Current account
transactions relation to imports and exports including net foreign aid. AKA trade account
38
Capital Account
records financial flows between canadians and foreigners, reflecting foreign investment in Canada and vice versa
39
Fiscal policy
taxation and gov spending
40
Federal fiscal year
april 1-March 31
41
Crowding out
significant gov borrowing can lead to reduced ability for businesses to borrow and has negative impact on economy as supply does not equal demand and leads to higher interest rates and increased borrowing costs
42
How are decisions made at BoC
consensus, NOT majority
43
Responsibilities of BoC
implementing monetary policy to keep inflation low and stable, maintaining the efficient operation of the financial system, designing, printing, and distributing Canadian banknotes (i.e., physical currency), and managing the government's accounts, foreign currency reserves, and federal debt
44
Monetary policy
goal is to preserve value of money in economy by keeping inflation low,stable and predictable.
45
Target overnight rate
is the mid point between the 50bp operation band. For instance, if the operating band is 1.5% to 2.0%, the target for the overnight rate would be 1.75%.
46
Open market Operations
used by the BoC, Special Purpose and Resale Agreement (SPRAs). Used to decrease interest rates. Also, sale and repurchase agreements (SRAs) Also Large Value Transfer Systems And Drawdowns and redeposits
47
How does an SPRA work
(1) the Bank offers an overnight loan agreement to another financial institution, (2) the Bank purchases Treasury bills from the financial institution on an overnight basis, (3) the financial institution sells Treasury bills to the Bank on an overnight basis to complete the lending, (4) the financial institution now has more money to lend out, and the increased money supply results in the overnight rate dropping, and finally (5) the next day, the financial institution pays back the loan to the Bank, and the transaction is reversed.
48
SRAs
Sale and Repurchase Agreements - used by BoC to increase interest rates. (1) the Bank sells treasury bills to other financial institutions on an overnight basis, (2) the Bank offers to borrow money to complete the deal, and finally (3) the financial institution buys Treasury bills from the Bank to complete the transaction.
49
Large Value Transfer system
used by BoC - a electronic wire system that lets institutions conduct large transactions with each other and track their payments through out the day. it ensures that trading in the overnight market stays within the Bank's 50-basis-point operating target, and participants know that the Bank will lend and borrow money within that range
50
Drawdowns and redeposits
used by BoC Drawdown is when BoC transfers deposits from its own bank accounts in chartered banks to its own account, reducing supply in market to increase interest rates. Redeposit is when bank transfers funds from its account to a chartered bank to reduce interest rates
51
Open Banking
financial services concept that allows third party financial services providers to access banking data through the use of application programming interfaces. Fosters interconnected and user friendly financial ecosystem.
52
How can block chain be used
Crypto Smart Contracts (self-executing contracts) Supply Chain Management Voting systems Record Keeping ID Verification Financial services Decentralized Autonomous Organizations (organizations run by code) NFTs
53
Central Bank Digital Currencies (CBDCs)
digital forms of fiat money, a digital token but issued by a central bank. Represent gov backed currency and equivalent in value to country's paper currency
54
Are digital currencies considered legal currency in Canada
no, but it is legal to use them to buy goods and services
55
who primarily regulates digital currencies
FINTRAC mainly.
56
how does CRA treat digital currencies for the income tax act
treats it as commodity. Gains treated as business income or capital gains and are taxed
57
roadblocks to financial planning
Lack of Knowledge Cost Personal Attitudes/Choices
58
Auction Market
buyers and sellers submit bids and offers to a trading platform and price is determined by highest bid. Seen as more transparent
59
What is bear market drawdown
usually 20% from recent highs
60
What is considered short term time horizon
1-3 years
61
what is considered med term time horizon
3-10 yrs
62
what is considered LT time horizon
10+yrs
63
What impacts risk tolerance
personality and experience, age, financial knowledge. Tolerance is comfort with losses
64
what is risk capacity and what affects it
individual's ability to withstand loss. Impacted by financial situation and goals, time horizon, dependents and financial responsibilities
65
what is risk need
risk required to achieve financial goal
66
what impacts risk tolerance and risk capacity
time horizon, investment objective, importance of investment for goal, personal attitudes, tolerance for downside volatility, net worth, amount of income, stability of income
67
how many risk tolerances does one person have
typically one. It is a personal attitude and attribute. CAN have multiple risk capacities for different goals
68
Geometric return
compound annual growth rate of an investment considering the effects of compounding
69
Arithmetic return
simple average of a series of returns over multiple periods. does not consider compounding
70
dollar weighted vs time weighted returns
dollar - accounts for timing and amount of inflows and outflows time weighted - measures compound growth rate of investment eliminating impact of capital inflows and outflows
71
systemic risk
aka market risk. cannot be eliminated through diversification
72
non-systemic risk
specific to company or industry. Can be reduced by diversification
73
what is volatility
degree of variation in the price of an investment over a specific period of time. It is a statistical measure of the dispersion of returns, indicating how much and how quickly the value of an asset changes
74
What is CAPM
capital asset pricing model - to determine the expected risk-adjusted return of an investment. Expected Return = Risk-Free Rate + βeta × (Market Return − Risk-Free Rate) the market return-risk free rate is the market risk premium. assumes markets are efficient, risks are constant over time, and investors have homogeneous expectations. In reality this is not the case.
75
What is the ranking of creditors
First Mortgages and Asset-Backed Securities Secured Debt Unsecured Capital Securities Preferred Shares Common Shares
76
Difference between bond and debenture
Bond has an asset as collateral but debenture does not. Therefore interest rates are higher for debentures.
77
Ex-div date
the second business day before the record date. (probably now one day before because we moved to T+1). The day when shares start trading on the market with out a right to the dividend.
78
what is the most tax efficient source of income
capital gains
79
examples of alternative investments
hedge funds, private equity, commodities, collectibles, crypto currency.
80
Do Hedge funds have a unique legal structure?
No, can be a trust or LLP
81
Types of PE
leveraged buyout mezzanine capital (financed by high yield unsec pref shares or subord loans) venture capital infrastructure
82
Insured Asset allocation
to avoid large losses and secure minimum return, as port gains value, investor adjusts exposure between risk free and riskier assets to rebalance back to a constant proportion.
83
Integrated asset allocation
considers investor risk AND economic expectations in asset mix
84
dynamic asset allocation
allocation that is continually adjusted by changing investors exposure to certain asset classes as market rise and fall in order to minimize downside risk and maximize returns.
85
mean variance optimization
maximizing return for a given level of risk
86
Different approaches to asset allocation
100-age=% in equities lifecycle approach which is just adjusting based on life stage
87
In what accounts should REITs be held?
tax deferred or tax free accounts as they pass along most of their earnings to investors.
88
Types of rebalancing
temporal - periodic rebalancing back to target weights regardless of market conditions. weight-based - rebalancing at certain thresholds or trigger points of over/underweight
89
most common structure for a mutual fund
open ended trust which allows fund to avoid taxation by flowing income through to unitholders. Trust deed establishes investment objectives. The other type of structure less common is Corporation where income the corp owns must primarily come from interest, dividends and capital gains. Corp doesn't have flow through status but can achieve tax free status by paying dividends through the year.
90
how does selling a mutual fund work
you sell the units back to the fund. This means they are in a constant state of primary distribution. You buy it at the NAV calculated at the end of the day you bought it.
91
Mutual fund NAV per share calc
(total assets-total liabs)/#outstanding units
92
What are the three principles guiding mutual fund regulation
Personal Trust, Disclosure, and regulation
93
what is National Instrument 81-101 and 81-102
one of the few NATIONAL regulations over securities. 81-101 deals with MF prospectuses and fund fact disclosures
94
Statement of Rights
a section on a fund facts page that advises investors of their rights and options within a defined period, including the right to cancel a purchase within 48 hours after receiving confirmation
95
how are pooled funds typically structured
as a Trust and the trustee holds the funds assets on behalf of investors ensuring that the fund is manages per the offering memorandum. They are offered through private placements, usually targeted at accredited or sophisticated investors... like the things we wanted to do for our HNW clients in private placement
96
Arbitrage using etfs?
Market participants can create or redeem ETF shares at the end of each day at their NAV, allowing for arbitrage between the ETF and its underlying securities. o If arbitrage is difficult and costly to implement, the tracking error level will be higher than normal. o Lack of liquidity and a large number of securities in the underlying index are two factors that could make arbitrage difficult and costly.
97
how often do passive/index ETFs in Canada and the US publish their holdings
Daily
98
standard ETFs
based on either exact replica of index or constructed reference index. Used for large cap stocks and holds stocks in same weight as index. Sampling is proves of selecting securities and their weighting to best match the performance of the index, usually used for fixed income and some international and small cap equity ETFs. Most transparent holdings of any ETF type.
99
Rules-based ETF
takes a goal oriented approach and follow an index focused on areas of the market that offer higher returns or lower risk than traditional indexes but retain the good things about ETFs like lower costs and increased transparency. For example - dividend ETF or "low volatility eft"... doesn't have to follow an index at all
100

CFP Prep - Hayley (8 decks)

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