(Part 2) INVESTMENT & SAVINGS (Chapter 1)

Question 1

Seg-fund terminology

Exchange-Traded Funds (ETFs)

Answer 1

An investment fund that lets you buy a large basket of individual stocks or government and corporate bonds in one purchase.

Question 2

Seg-fund terminology

Fund-Fact

Answer 2

A document that highlights key information for investors about a particular fund (mutual fund or an exchange-traded fund (ETF))

Question 3

Seg-fund terminology

Know Your Client (KYC)

Answer 3

The mandatory process of identifying and verifying the client’s identity when opening an account and periodically over time

Question 4

Seg-fund terminology

Investor Protection Corporation (IPC)

Answer 4

Not-for-profit corporation established by the Mutual Fund Dealers Association of Canada (“MFDA”) to administer investor protection of client assets in the event that the Member Firm becomes bankrupt.

Question 5

Seg-fund terminology

Annual information Form (AIF)

Answer 5

Material information about a company and its business in the context of its historical and possible future development

Question 6

Seg-fund terminology

Real Estate (Investment)

Answer 6

Residential, commercial, and industrial properties that the investor buys and, in turn, rents or leases to occupants

Question 7

Seg-fund terminology

Equity risk

Answer 7

• The risk of losing money due to a reduction in the market price of shares

Anyone who invests in stocks listed on the stock market, directly or indirectly through equity funds, faces equity risk.

Question 8

Seg-fund terminology

Cryptocurrency

Answer 8

• Bitcoin, cryptos and alt coins
• Alternative payment method or speculative investment.
• They’re exchanged on decentralized computer networks between people with virtual wallet

Question 9

Seg-fund terminology

Net Asset Value (NAV)

Answer 9

• Net value of an investment fund’s assets minus its liabilities, divided by the number of shares outstanding
• Commonly used in the context of a mutual fund or an exchange-traded fund (ETF)

Example;
If an investment company has securities and other assets worth 100 million and has liabilities of 10 million, the NAV will be 90 million

Question 10

Seg-fund terminology

Defined benefit pension plan (DBPP)

Answer 10

Program that pays a specified pension at retirement to plan members.

Question 11

Seg-fund terminology

Defined contribution pension plan (DCPP)

Answer 11

Employer Pension plan that enables the employee to contribute and set aside money for retirement.

Question 12

Seg-fund terminology

Group registered retirement savings plan (GRRSP)

Answer 12

Employer-sponsored plan that allows eligible employees to contribute to their retirement savings while benefiting from more competitive management fees.

Question 13

Seg-fund terminology

Pooled registered pension plan (PRPP)

Answer 13

Retirement savings plan for small business employees and the self-employed in which the sum available at retirement is not specified in advance.

Question 14

Seg-fund terminology

Tax-free savings account (TFSA)

Answer 14

An account that allows an investor to earn tax-free investment income

Question 15

Seg-fund terminology

Mortgage stress test

Answer 15

Determine whether an individual would be able to afford their principal and interest payments should interest rates increase.

Question 16

Seg-fund terminology

Deferred profit sharing plan (DPSP)

Answer 16

Pension plan offered by companies to share a portion of their business profits with employees who are plan members.

Question 17

Seg-fund terminology

Interest rate risk

Answer 17

Experienced when an investment is locked in at a low interest rate

Question 18

Seg-fund terminology

Inflation risk

Answer 18

• Also known as purchasing power risk
• The longer the time horizon for investing, the greater the impact of inflation can be.
• Long-term investments with low returns are vulnerable to inflation risk

Question 19

Seg-fund terminology

Liquidity Risk

Answer 19

• The risk that an investment cannot be easily and quickly converted into cash.
• (Real estate, Annuities are subject to liquidity risk)

Question 20

Seg-fund terminology

Industry risk

Answer 20

Risk faced by specific industries, such as technology or mining

Question 21

Seg-fund terminology

Credit risk

Answer 21

• Credit risk (also known as default risk) is the risk that a borrower will fail to repay a loan or other financial obligation
• Relevant to corporate bond issuers

Question 22

Seg-fund terminology

Foreign exchange risk

Answer 22

• Also known as currency risk
• The chance that a company will lose money on international trade because of currency fluctuations

Question 23

Seg-fund terminology

Market risk

Answer 23

The possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.

(Recessions, Natural disasters, terrorist attacks.)

Question 24

Name the risk associated in a savings account

Answer 24

• Inflation risk

Question 25

What are some *ADVANTAGES* of a Guaranteed Investment Certificates (GICs)? *(name at least three)*

Answer 25

- Guaranteed return of principal and interest as promised; - Variety of products available to give investors choice; - Available for as little as $500. This helps young investors or investors just starting out who have not yet amassed a more sizeable nest egg for investing; - Convenient, easy to understand, and easy to buy; - Penalties for early redemption are waived if the investor dies during the term-to-maturity; - No out-of-pocket fees.

Question 26

What are some *DISADVANTAGES* of a Guaranteed Investment Certificates (GICs)? *(Name at least three)*

Answer 26

- Low rates of return; - Return is paid as interest income and taxed accordingly; - Subject to probate fees on death, unlike their insurance equivalent called accumulation annuities; - Interest rate risk; - Inflation risk; - Significant penalties charged to the investor who needs access to the funds in the GIC prior to its maturity date

Question 27

Where and how do you buy Guaranteed Investment Certificates (GICs)?

Answer 27

- Banks and trust companies; - Credit unions; - Caisses populaires; - Insurance companies; - Investment dealers; - Specialized GIC deposit brokers

Question 28

What are the different types of GICs? *(name at least three)*

Answer 28

- Fixed-interest GICs - Cashable/Redeemable GICs - Escalating GICs - Variable-interest GICs - Market-linked GICs - Foreign currency GICs - Insurance GICs

Question 29

What are the risks associated with GICs?

Answer 29

- Interest rate risk - Inflation risk

Question 30

In regards to mutual funds, the advisor should explore the characteristics of funds to ensure suitability to client needs. The client should understand a couple of things, name at least three.

Answer 30

- How mutual funds make money; - What makes them go up in value; - The total fees to buy, hold, and sell their funds; - The risks of their investment; - How easily their investment could be redeemed as cash.

Question 31

Investors in a mutual fund pay fees to participate in the fund, what are the 3 types of fees?

Answer 31

- The management expense ratio (MER) - The trading expense ratio (TER) - deferred sales charge (DSC) (front-end-load, back-end-load)

Question 32

What are some *ADVANTAGES* of a Mutual Fund? *(name at least three)*

Answer 32

- Wide variety of funds available; - Ease of investment; - Vast amount of information available on funds both before and after purchase; - Diversification; - Small minimum purchase required; some funds allow an initial investment of $500 with minimum deposits of $25; - Professional management; - Liquidity; - Ease of switching from one fund to another; - Ease of redeeming units.

Question 33

What are some *DISADVANTAGES* of a Mutual Fund? *(name at least three)*

Answer 33

- Mutual funds are not intended to be a short-term investment and investors must be prepared to hold units for a long period of time to achieve desired returns; - No protection against losses, like that offered by the guarantees of a segregated fund; - Tax complexities arise in non-registered accounts that require investors to monitor fund activity; - The fees, such as MER, can erode returns significantly over time.

Question 34

Where and how do you buy mutual funds?

Answer 34

- Banks - Credit unions - Insurance companies - investment dealers - Mutual fund companies

Question 35

What are the *different types* of mutual fund?

Answer 35

- Cash, including funds in the money market; - Fixed-income; - Equity; - Commodity;

Question 36

What are some *ADVANTAGES* of a ETFs? *(name at least three)*

Answer 36

- Diversification; - Convenience of trading like stocks; - High degree of transparency with holdings disclosed daily; - Lower MER than mutual funds and segregated funds; - No sales load; - Professional management; - Ability to react rapidly to market developments and speculation on short-term price movements; - Ability for advanced trading transactions such as limit, stop loss, margin and short sale orders, options, and sector rotation; - Exposure to commodities provided to small investors.

Question 37

What are some *DISADVANTAGES* of a ETFs? *(name at least three)*

Answer 37

- A commission is usually charged on buy and sell orders; - Low liquidity for ETFs that are not frequently traded or not traded in high volumes; - Fees include both MER and TER; - Complexity of the investment

Question 38

What are some *ADVANTAGES* of Real estate? *(name at least three)*

Answer 38

- Potential to earn a steady rental income; - Potential to earn a capital gain on the sale of the income property and benefit from the tax advantages accorded to capital gains thanks to the capital gains exemption; - Potential to see an increase in property value due to general real estate market conditions or due to improvements in the property that the investor makes; - Easily purchased investment; - Physical asset that can be used as collateral to secure borrowing

Question 39

What are some *DISADVANTAGES* of Real estate? *(name at least three)*

Answer 39

- Need to fund the down payment for the land or property: - Need of the investor to provide evidence of financial stability and strength - Commissions charged on real estate sales by sales agents are high and greatly reduce the sale proceeds - Value is subject to market conditions - Obligations of becoming a landlord - Ongoing expenses in the form of property maintenance, property tax, and landlord insurance - Government speculation tax

Question 40

Risks associated with Real Estate

Answer 40

- Liquidity risk - Market risk

Question 41

What are the different type of group plans? *(name a few)*

Answer 41

- Defined benefit pension plan (DBPP) - Defined contribution pension plan (DCPP) - Group registered retirement savings plan (GRRSP) - Deferred profit sharing plan (DPSP) - Tax-free savings account (TFSA) - Pooled registered pension plan (PRPP)

Question 42

What are the Risks in participating in a group plan?

Answer 42

If a plan member *(e.g., an employee)* is responsible for making his own investment decisions *(as he would in a DCPP or a GRRSP)*, then he faces the risks that come with investing, such as **interest rate risk, inflation risk and market risk**.

Question 43

Name a few **investment risks**

Answer 43

- Equity risk - Inflation risk - Interest rate risk - Market risk - Liquidity risk - Foreign exchange risk - Credit risk - Industry risk

Question 44

When credit quality is low, as is the case for low-rated bonds, credit risk is _________.

Answer 44

When credit quality is low, as is the case for low-rated bonds, credit risk is **very high.** - *Low credit risk = High credit quality = Lower returns* - *High credit risk = Low credit quality = Potentially higher returns*