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SEGREGATED FUNDS & ANNUITIES (OFFICIAL LLQP) > INVESTMENT & SAVINGS (Chapter 1) > Flashcards

INVESTMENT & SAVINGS (Chapter 1) Flashcards

1
Q

DISCLAIMER

A

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2
Q

Seg-funds Terminology

Investing

A

The process of using savings to purchase investment products with the goal of making money.

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3
Q

Seg-funds Terminology

Share

A

Units of stocks issued by a corporation that represent ownership

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4
Q

Seg-funds Terminology

Return

A

Principal sum or capital, in an investment product that will be repaid to the investor plus a profit.

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5
Q

Seg-funds Terminology

Mutual Fund

A

A company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.

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6
Q

Seg-funds Terminology

Annuity

A

A contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future.

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7
Q

Seg-funds Terminology

Segregated fund

A

An investment pool used by insurance companies to offer both capital appreciation and death benefits to policyholders.

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8
Q

Seg-funds Terminology

Stock

A

A share in the ownership of a company

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9
Q

Seg-funds Terminology

Bond

A
  • A promise by a borrower to pay a lender their principal and usually interest on a loan.
  • Bonds are issued by governments, municipalities, and corporations.
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10
Q

Seg-funds Terminology

Rate of return

A

The net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.

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11
Q

Seg-funds Terminology

Guaranteed Investment Certificates (GICs)

A

A deposit investment sold by Canadian banks and trust companies that allows investors to deposit money in the bank for a fixed length of time and then receiving interest on that money and the principal when the investment matures.

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12
Q

Seg-funds Terminology

Capital Investment

A

Acquisition of physical assets by a company for use in furthering its long-term business goals and objectives. (Real estate, manufacturing plants, and machinery)

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13
Q

Seg-funds Terminology

Simple &
Compound interest

A

SIMPLE INTEREST

  • A charge that borrowers pay to lenders for a loan.

COMPOUND INTEREST

  • Simple interest on funds calculated on both the initial principal and the accumulated interest from previous periods
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14
Q

CHAPTER 1 - Investment & Saving

Commodity

A
  • A basic good used in commerce that is interchangeable with other goods of the same type

Often used as inputs in the production of other goods or services.

Commerce can refer to an exchange of goods or services for money or something of equal value.

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15
Q

Seg-funds Terminology

Diversification

A

Strategy used in investment portfolios that combines asset classes and investments within those classes to spread out investing risk.

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16
Q

Seg-funds Terminology

Asset class

A
  • A grouping of investments based on shared behaviors, characteristics, and regulations.

(Cash, Equities, Fixed income, alternative investments)

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17
Q

Seg-funds Terminology

Time value of money

A
  • Present Value
  • Future Value

Principles that are based on the potential for invested money to increase in value over time due to interest being earned.

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18
Q

Seg-funds Terminology

Liquidity

A

describes the ability to cash in, or sell, an investment quickly at or near its current market price.

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19
Q

Seg-funds Terminology

Time Horizon

A

A future event when invested money will be needed to meet financial objectives

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20
Q

Seg-funds Terminology

Canadian Investor Protection Fund (CIPF)

A

Non-profit insurance program designed to protect investors from the bankruptcy of an individual investment firm.

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21
Q

Seg-funds Terminology

Assuris

A

Non-profit organization that protects policyholders if their life insurance company fails.

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22
Q

CHAPTER 1 - Investment & Saving

Explain the different concepts of investing

A
  • Pay yourself first
  • Save 10% of take-home pay
  • Save exceptional payments
  • Set up savings buckets
  • Budgetting
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23
Q

What are the 3 main asset classes?

A
  • Stocks (also called equities)
  • Bonds (also called fixed income or
    debt)
  • Cash (also called money market instruments)

Extras

  • Real Estate
  • Commodities
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24
Q

Diversification can be accomplished in many ways, name at least three

A
  • Buying stocks of a wide range of industries or companies
  • Buying bonds with varying interest rates
  • Buying shares
  • Buying / Trading ETFs
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25
Q

TRUE OR FALSE?

When an investor buys into a pooled investment, like a segregated fund, he automatically receives the benefit of diversification.

A

TRUE

26
Q

TRUE OR FALSE?

When an investor buys one stock or bond, or ten, or even one hundred, he can receive the full benefit of diversification

A

FALSE

When an investor buys one stock or bond, or ten, or even one hundred, he is not receiving the full benefit of diversification.

[Ref. 1.1.2.4]

27
Q

TRUE OR FALSE?

A savings account is a liquid investment

A

TRUE

28
Q

TRUE OR FALSE?

Real estate is often cited as an example of an illiquid investment

A

TRUE

29
Q

What is the formula used to calculate the PRESENT VALUE of money?

A

present value ÷ (1 + interest rate) x number of years = present value
$5,000 ÷ (1 + 0.03)5 = $4,313.04

  • The number of years is multiplied by itself (ex. 5 years = 3 x 3 x 3 x 3 x 3)
30
Q

What is the formula used to calculate the FUTURE VALUE of money?

A

Present value x (1 + interest rate) x number of years = future value
$5,000 × (1 + 0.03)5 = 5,796.37

  • The number of years is multiplied by itself (ex. 5 years = 3 x 3 x 3 x 3 x 3)
31
Q

Investment objectives can be classified as…

A
  • Short term ( 3 yrs or less) (saving for holiday next year)
  • Medium term (Three and 10 years) (Saving for a new car or for the down payment for a house in 5 years)
  • Long term (10 years or more.) (saving for retirement)
32
Q

Many forms of accounts are available to meet investment objectives. What are some common forms of accounts?

A
  • Registered retirement savings plan (RRSP)
  • Registered education savings plan (RESP)
  • Registered disability savings plan (RDSP)
  • Tax-free savings account (TFSA)
  • Registered pension plan (RPP)
33
Q

TRUE OR FALSE?

Those who have a long time horizon have the ability to invest more aggressively, or with more risk.

A

TRUE

34
Q

What is the legal term for Segregated Fund?

A

Individual Variable Insurance Contract (IVIC)

35
Q

Why do people buy segregated funds?

A

To benefit from the guarantees they offer for return of capital.

36
Q

Why are the funds “segregated”?

A

Because Insurers keep their segregated funds separate from other company assets

37
Q

What are some additional key points about segregated funds?

A
  • People buy segregated funds to benefit from the guarantees they offer for return of capital.
  • Less risky than mutual funds
  • The proceeds bypass probate
  • Segregated funds are available as investment options for non-registered accounts and registered accounts, such as an RRSP

[Ref. 1.3.1]

38
Q

Unique ADVANTAGES of segregated funds include (Name three )…

A
  • Maturity and death benefit guarantees;
  • Ability to reset provided in some contracts;
  • Possible creditor protection;
  • Right to designate a beneficiary and bypass probate;
  • Tax benefit received when capital losses are incurred;
  • Investor protection provided by Assuris

[Ref. 1.3.1.1]

39
Q

Name at least three ADVANTAGES segregated funds share with other fund investments

A
  • Wide variety of funds available;
  • Ease of investment;
  • Vast amount of information available on funds, both before and after purchase;
  • Diversification provided;
  • Professional management provided by the fund manager;
  • Liquidity;
  • Ease of switching from one fund to another;
  • Ease of redemption (making a withdrawal or surrender of the contract);
  • Ability to create an income stream from account value;
  • Available for registered (such as RRSP) and non-registered accounts.

[Ref. 1.3.1.1]

40
Q

Name some unique DISADVANTAGES of segregated funds that are not shared by other fund investments

A
  • Minimum 10-year term-to-maturity for the maturity guarantee to apply;
  • Often higher fees charged to investors than mutual funds, in the form of the management expense ratio (MER);
  • Possible age restrictions on deposits.

[Ref. 1.3.1.1]

41
Q

Name Some DISADVANTAGES segregated funds share with other fund investments

A
  • Too many choices of funds and often little differentiation between choices;
  • Sales charges, and ongoing fees charged as the MER.
42
Q

Where do you buy seg funds?

A

They are sold primarily by life insurance agents and brokers

43
Q

TRUE OR FALSE?

Investors with registered accounts usually report returns for tax purposes every year

A

FALSE

Investors with registered accounts do not report returns for tax purposes every year.

They earn returns the same as those with non-registered accounts but their returns are reinvested in the contract. However, when the time comes to make a withdrawal from their registered contract, investors will find that the sum they receive is taxed at the same rate as income from interest, regardless of how it was earned.

[Ref.1.3.1.4]

44
Q

TRUE OR FALSE?

Investors are able to limit negative returns from their segregated fund investments due to the maturity guarantee and death benefit guarantee

A

TRUE

45
Q

TRUE OR FALSE?

There is no death benefit provided in segregated fund contracts.

A

FALSE

  • There is a death benefit guarantee provided in segregated fund contracts.
  • If the life insured, called the annuitant, named in the contract dies during the term of the contract, the beneficiary receives a minimum of 75% of the sum invested.
  • If the market value of the contract is higher than the 75% guarantee, the beneficiary receives the market value.

[Ref.1.3.1.4]

46
Q

The returns segregated fund investors receive are earned as…

A
  • Interest,
  • Dividends,
  • Foreign income,
  • Capital gains.
47
Q

TRUE OR FALSE?

Consumers are protected against insolvency, or bankruptcy, of the insurer that holds their segregated fund contracts through Assuris.

A

TRUE

48
Q

Name at least three ADVANTAGES of annuity?

A
  • Steady income stream
  • Choice of payment frequency (monthly, quarterly, semi-annually, or annually);
  • No need for investment decisions
  • No need to monitor performance
  • No worry about outliving one’s money when a life annuity or joint and last survivor annuity is
    purchased;
  • If the annuity is prescribed, less tax may be due in the early years of payment;
  • Investor protection of insurance annuity contracts through Assuris;
  • Available for registered (such as RRSP) and non-registered accounts.
49
Q

Name at least three DISADVANTAGES of annuity?

A
  • Lack of flexibility (changes cannot be made to the annuity contract);
  • Interest rate risk: if interest rates rise during the contract, the contract continues annuity payments based on the initial, lower annuity rate;
  • Penalties to surrender or withdraw from the contract;
  • Loss of principal for an annuitant with a life annuity if death occurs before all the capital paid to buy the annuity has not been paid out in benefits;
  • The amount of money needed to fund an annuity (often not less than $50,000);
  • If the annuity is non-prescribed, there may be a greater tax liability in the early years of payment
50
Q

What are the types of annuity?

A
  • Term annuity, also known as a term certain annuity
  • Life annuity
  • Joint annuity, also known as a joint and last survivor annuity
51
Q

FILL IN THE BLANK!

Annuities are subject to ________ risk

A

Interest rate risk

52
Q

Stock is issued in two forms what are they?

A

Preferred stock (or shares)

  • Preferred stocks must pay a dividend before the dividend payment is made for common stocks.

Common stock (or shares)

  • Common stock owners have voting rights that allow them to express their wishes in regard to the company at the annual general meeting.
53
Q

Name at least three ADVANTAGES of Stock

A
  • Benefit from gains in a stock’s price
  • High degree of transparency in stock market investing
  • Dividends
  • Opportunity to attend annual meetings of the corporation
  • Favourable tax rates for capital gains and capital losses
  • Available in self-directed registered (such as RRSP) and non-registered accounts
54
Q

Name at least three DISADVANTAGES of Stock

A
  • Possibility of loss, even total loss, of principal invested;
  • Possible absence of diversification in the portfolio that exposes the investor to risk;
  • Need to monitor price movement and identify when to buy and sell;
  • Not all companies pay dividends and there is no guarantee that dividends will be paid;
  • Commissions charged on every trade;
  • Liquidity issues if stocks must be sold at a time when the price is depressed but the investor needs money;
  • No naming of a beneficiary on a non-registered account;
  • No creditor-proofing;
  • No ability to rescind a sale.
55
Q

Returns on stocks are in the form of

A
  • Capital gains, when stocks are sold at a profit;
  • Dividends, when declared by the Board of Directors.
56
Q

What’s the difference between a blue chip stock and penny stock?

A
  • Blue-chip stocks are the stocks of large, well-known, and well established companies, they are also the least risky forms of stock ownership.
  • Penny stocks are the most risky forms of ownership. They are illiquid and valued at less than $5.
57
Q

What are the different type of bonds?

A
  • Government of Canada Bonds
  • Provincial bonds
  • Municipal bonds
  • Corporate bonds
  • Foreign bonds
58
Q

What are some factors that affect the return of a bond?

A
  • Interest (coupon) rate;
  • Maturity date;
  • Credit quality;
  • Price.
59
Q

Name a few risks, associated with bonds?

A
  • Interest rate risk
  • Reinvestment risk,
  • Inflation risk,
  • Credit risk
  • Liquidity risk
60
Q

FILL IN THE BLANK!

In regards to segregated funds ______________ describes the key benefits of the contract. It also provides information about the fund itself, such as fees the investor pays and past performance.

A

The information folder

61
Q
A

SEGREGATED FUNDS & ANNUITIES (OFFICIAL LLQP) (20 decks)

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