Learnings

Question 1

The manager of the Venture Fund has invested the portfolio as follows: 5% in cash, 40% in fixed income, 30% in Canadian equities, and 25% in foreign equities. The investment objectives of the fund restrict the manager from holding greater than 40% of the fund in foreign equities. He also has to maintain between 40% and 60% of the portfolio in fixed income. What type of mutual fund is the Venture Fund?

Answer 1

Balanced funds invest in a combination of cash, bonds, and stocks. Most balanced funds are required to hold minimum percentages of each type of investment, according to objectives set out in the fund’s prospectus. Usually, there is a range specifying the minimum and maximum limits for each asset category. The Venture Fund would fall under this category.

Question 2

Diane is a retired widow who wants a monthly income from her mutual fund portfolio. She is concerned about losing money so the ideal investment would be a fairly conservative fund. Which of the following mutual funds can provide a monthly income but is low risk?

Answer 2

Diane needs a fund that provides her a monthly income and is fairly conservative. A mortgage fund would fulfill her requirements. A money market fund is probably too conservative and will not provide her with sufficient income. A balanced fund or Canadian dividend fund may exceed Diane’s comfort level with risk.

Question 3

Which of the following products has the potential to provide protection from creditors?

Answer 3

Segregated funds are the life insurance industry’s equivalent to mutual funds. Since they are life insurance products, segregated funds have the potential to provide protection from creditors.

Question 4

Which of the following is a benefit of investing in open-end mutual funds?

Answer 4

Mutual funds offer many benefits including professional management, liquidity, low cost, convenience, and diversification. Mutual fund returns are not guaranteed and there is no principal guarantee feature. Open-end mutual funds are not exchange traded, but rather units are bought and redeemed directly through the mutual fund company, also known as the investment fund manager

Question 5

What is the characteristic of a closed-end mutual fund?

Answer 5

A closed-end mutual fund may be listed and sold on a stock exchange. These funds issue a set number of shares when the company is organized. Since there are a set number of shares, interested investors can purchase the fund from current shareholders only, through the secondary market. This process does not normally involve the issuing company. The price of the shares may or may not reflect the net asset value per unit (NAVPU). The NAVPU is based on the value of the investments held by the fund, while the price is subject to market conditions.

Question 6

Which of the following statements about the Mutual Fund Dealers Association (MFDA) is CORRECT?

Answer 6

The MFDA is the self-regulatory organization for the distribution side of the Canadian mutual funds industry. Not all provinces require mutual fund dealers to join the MFDA. The MFDA has the authority to fine, suspend or terminate the membership of its members.

Question 7

What does the Mutual Fund Dealers Association (MFDA) have the power to do?

Answer 7

The MFDA is empowered by securities regulators in each of the enumerated jurisdictions to:
admit members
perform compliance reviews
enforce rules through a transparent disciplinary process that can result in fines, suspension, or termination of membership
Initiating securities legislation is the role of the government. The Canadian Securities Administrators draft national instruments. The MFDA does not have the ability to compensate victims of fraud.

Question 8

Which of the following organizations is regulated under the Personal Information Protection and Electronic Documents Act (PIPEDA)?

Answer 8

PIPEDA is Canada’s private sector privacy law. PIPEDA establishes rules for how federally regulated, private sector organizations such as banks, telecommunications companies, and transportation firms may collect, use, or disclose personal information about customers or employees in the course of commercial activities. The public sector is governed by the Privacy Act.

Question 9

What responsibilities do provincial and territorial securities commissions have

Answer 9

To register mutual fund dealer firms and individuals to sell securities in their province.

Question 10

Suryono is unclear about Mutual Fund Dealers Association (MFDA) rules regarding client communications, and seeks your help. Which of the following statements about MFDA client communication rules is CORRECT?

Answer 10

MFDA rules regarding client communications refer to written communication.

Question 11

Which of the following statements about excessive trading is correct?

Answer 11

It is a practice that provides little economic benefit to the client and only benefits the representative.

Question 12

Which of the following rules pertain to your registration as a mutual fund dealing representative?

Answer 12

The securities regulatory authority must be informed of any material or significant change in your personal circumstances. You must be registered in the province in which you wish to sell mutual funds by the appropriate provincial securities regulatory authority, but you do not need to live there. You cannot begin to sell securities until you have received formal confirmation from the securities regulatory authority, not the MFDA, that your application for registration has been approved and registration granted. Only the authorized firm representative (AFR) of a mutual fund dealer can submit filings through NRD.

Question 13

What step in the Strategic Investment Planning Process involves changing and evolving the investment plan over time?

Answer 13

Monitoring the investment plan involves changing and evolving the strategic investment plan over time. As your client’s needs change, so will the investment plan.

Question 14

Lou Romano, a financial planner, meets with his client, Reena Shah. Reena and Lou have already determined her investment objectives and gathered her financial data. Reena likes to read the business news and is eager to invest in the latest investment trend. She likes to call Lou with these ideas, but he is hesitant to endorse any investments that require a great deal of risk since Reena is an impatient investor. Where are Lou and Reena in the investment planning process?

Answer 14

clarifying the client’s status, problems and opportunities

Question 15

What happens to the supply of the good or service produced when the sale price increases?

Answer 15

The supply of the good or service produced increases when the sale price of the good or service increases

Question 16

ABC Corporation is attempting to raise $100 million from the financial market. It is offering to issue shares to the public through an Initial Public Offering (IPO). The shares are priced at $25 and investors from all over the world are likely to subscribe to the IPO. In which market is ABC corporation attempting to raise funds?

Answer 16

ABC corporation are issuing their shares in the primary market. Through the initial public offering, they are raising capital directly from investors.

Question 17

Which of the following are characteristics of investment capital?

Answer 17

Scarcity
Mobility
Sensitivity

Scarcity refers to the limited supply of capital and mobility is the ease and speed with which capital moves from one part of the world to another. Sensitivity is the degree to which investment capital is influenced by changes in financial markets and the overall economy

Question 18

Why would a yield curve be inverted?

Answer 18

Inverted yield curves are downward sloping indicating that short-term bonds have higher rates than long-term bonds. This suggests investors expect rates to decline. This can be a sign that a recession is forthcoming.

Question 19

What is characteristic of a closed-end mutual fund?

Answer 19

A closed-end mutual fund may be listed and sold on a stock exchange. These funds issue a set number of shares when the company is organized. Since there are a set number of shares, interested investors can purchase the fund from current shareholders only, through the secondary market. This process does not normally involve the issuing company. The price of the shares may or may not reflect the net asset value per unit (NAVPU). The NAVPU is based on the value of the investments held by the fund, while the price is subject to market conditions.

Question 20

If a fund has a beta of 2, what is the expected outcome for the fund?

Answer 20

The market or index to which a fund is compared is given a beta equal to 1. If a fund has a beta of 2, its price is expected to rise or fall by twice as much as the overall market. In other words, it should outperform (or underperform) the market by 100%.

Question 21

Last year, Clarence contributed $5,000 to his tax-free savings account (TFSA). This year, he withdrew the entire $5,000 plus $200 income that had accumulated from his initial contribution. He made no contribution to his TFSA this year. How much may he contribute to his TFSA next year? Assume the maximum contribution amount is $5,000 for all three years.

Answer 21

Solution: For next year, Clarence’s TFSA contribution room is:
In respect of next year. 5,000
In respect of the total withdrawal 5,200
In respect of unused contribution room this year 5,000
Total $15,200

Question 22

John Smith invested $100,000 in a Canadian equity mutual fund and paid a 4% front-end sales charge. The net asset value per unit (NAVPU) of the fund at the time of purchase was $10. John decides to set up a ratio withdrawal plan under which he receives an annual payment at the end of each year based on 8% of the market value of his investment at the time of the withdrawal. His first withdrawal is due when the fund is valued at $11.75 per unit. Approximately what amount does John withdraw this year?

Answer 22

John Smith withdraws $9,024 in the first year, calculated as follows: Step 1: Determine the purchase price. Given the 4% front-end sales commission, the purchase price for John’s units is $10.42, calculated as ($10 NAVPU ÷ (1 – 4% front-end sales charge)). Step 2: Determine the number of units purchased net of commission charges. John purchases 9,600 units, calculated as ($100,000 ÷ $10.42). Note: To receive an accurate calculation, do not clear your calculator. Otherwise, you will incur a rounding error. Step 3: Determine the number of units redeemed via 8% ratio withdrawal plan. John will redeem 768 units, calculated as (9,600 x 8%). Step 4: Determine the amount withdrawn. John will receive a total of $9,024, calculated as (768 units x $11.75 NAVPU).

Question 23

What statement regarding registered education savings plans (RESPs) is CORRECT?

Answer 23

As a subscriber, you contribute to an RESP for the benefit of your designated beneficiary(ies). You may contribute a lifetime maximum of $50,000 per beneficiary. There is no annual limit. Your contributions are not tax deductible. If the designated beneficiary does not proceed to a post-secondary institution, contributed principal is returned to the subscriber without any tax implications. CESGs are available to all qualified beneficiaries despite family income; however, low income families may receive a greater amount of CESG.

Question 24

Phuong has a $1,500 tax refund and would like to invest it in the LACROIX Capital Fund. It currently has a net asset value per unit (NAVPU) of $5.75 and her dealing representative will sell the fund with a front-end sales charge of 1.5%. If she invests today, how many units would she purchase?

Answer 24

Phuong’s purchase price for her mutual fund is $5.84, calculated as ($5.75 NAVPU ÷ (1 – 1.5%)). She will receive 256.9565 units, calculated as ($1,500 ÷ $5.84). Note: To receive an accurate calculation, do not clear your calculator. Otherwise, you will incur a rounding error.

Question 25

What characteristic about a defined benefit pension plan is TRUE?

Answer 25

Defined benefit plans may be financed solely by the employer, or through contributions made by both employee and employer. Since the employer guarantees a defined benefit at retirement, the employer assumes the investment risk. Benefit amounts may be calculated based on a flat rate, best or last years, or average career methods. Retirement benefits are taxable.

Question 26

Robert withdraws $25,000 from his registered retirement savings plan (RRSP) under the Home Buyer’s Plan (HBP) on Jan 31, Year 1

Answer 26

Robert must complete the transaction by October 1st of the year after the withdrawal. He will be required to repay the amount in 15 equal instalments. No interest is required to be paid on the withdrawal. His first HBP repayment must be made at the latest on Mar 1, Year 4. If Robert is married, his spouse can also withdraw up to $25,000 from his or her RRSP.

Question 27

Ellie is leaving her employer and wants to transfer out her vested pension funds to a locked-in retirement account (LIRA). Which of the following statements about Ellie’s LIRA is CORRECT?

Answer 27

Like an RRSP, Ellie controls the investments within her LIRA. Unlike an RRSP, she cannot make any contributions to the plan, withdraw from it, or convert it to a RRIF. Generally, she may not access these funds until retirement She may convert her LIRA to a life income fund (LIF) or locked-in retirement income fund (LRIF) to provide a life income.

Question 28

Your client, Rakesh, works for a manufacturing company. His employer has a defined contribution pension plan for its employees. Rakesh is curious about whether he should join the plan. What can you tell him about defined contribution pension plans?

Answer 28

A defined contribution pension plan defines the contribution that an individual and his or her employer will make each year before the employee’s retirement. The pension adjustment is based on these contributions. Employer contributions are not dependent on the profitability of the company but rather the pension guidelines specified by the plan. The employee is not guaranteed a particular benefit at retirement. The amount available for retirement is instead dependent on how well the investments are managed.

Question 29

To whom are you permitted to make an unsolicited telephone call to market new products (“cold-call”) if they have signed up on the National Do Not Call List (DNCL)?

Answer 29

If someone is on the DNCL, you are not permitted to make unsolicited calls for telemarketing purposes unless you already have a business relationship with them. If they are already your client, they would expect to hear from you from time to time regarding investment advice, changing market conditions, or even due to regulatory requirements, depending on the nature of the relationship. Past clients are no longer your clients so you do not have a business relationship with them.

Question 30

Which of the following statements regarding ethical conduct is true?

Answer 30

Ethics defines the standards of conduct to which you and members of your group are expected to adhere. Ethical conduct means confirming to those approved standards, which in turn safeguards client interests and maintains the integrity of the firm.

Question 31

Which statement about the registration process is TRUE?

Answer 31

Objections to your registration may be due to unacceptable past employment history in the securities industry, or from a criminal record in which the crime involved integrity or conduct. The advantage of NRD is that an applicant needs to file only one application for registration in more than one jurisdiction, through the passport system. Under NI 31-103, there is no renewal requirement for registration in any jurisdiction. Registration remains effective until it is suspended or terminated. If you leave your employer, your registration is suspended pending notification of the appropriate securities regulatory authority. You can, however, have your registration reinstated should you join another firm. Generally, you cannot begin to sell mutual funds or provide advice until your registration has been reinstated through your new employer and you receive written confirmation of this from the securities regulatory authority.

Question 32

Today is Sheldon’s first day as a dealing representative. He is in the process of opening an account for his client. He is not sure of how to furnish the relationship disclosures to his first client. How should Sheldon provide the relationship disclosures required under the Client Relationship Model (CRM)?
oday is Sheldon’s first day as a dealing representative. He is in the process of opening an account for his client. He is not sure of how to furnish the relationship disclosures to his first client. How should Sheldon provide the relationship disclosures required under the Client Relationship Model (CRM)?

Answer 32

Disclosures can be provided in writing on the account opening form or on a separate form. There is no prescribed format but the disclosures must be in written plain language.