PRACTICE EXAM QUESTIONS Flashcards
Who are you permitted to make an unsolicited telephone call to market new product
Someone you already have a business relationship with
Works with investors and their legal counsel to ensure fair treatment in court cases involving investment fraud
OBSI
What is the minimum dollar amount of a cash deposit that a people is required to report to FINTRAC
Anything over $10,000
A dealing rep recommends mutual funds to his client based on which funds pay the highest commission
Conflict of interest
Refers to conduct involving peace order and the rule of law
Ethical Conduct
MFsa Has several rules dealing with different aspects of the mutual fund business. Conduct Rule 2 offers details on how both you and employer are the carry out business. What is covered in Rule 2.
Standard of conduct for ethics
Protecting the confidentiality of client information
Proper conduct
Objections to your registration may be due the unacceptable past employment history in the securities industry
Registration process
TRUE OR FALSE
All unethical actions are breaches of the standard of conduct
True
Under Mutual Fund Dealers Association of Canada rules you have the duty to disclose?
Outside business activities
Today is Sheldon’s first day as a dealing rep. He is in the process of opening an account for his client. He is not sure of how to furnish the relationship disclosure to his first client. How should Sheldon provide the relationship disclosures required under the Client Relationship Model (CRM)
Disclosures should be provided in writing to the client on the account opening forms OR on a separate form
Client one is a x-Ray tech with a salary of $55,000
Client two is a pharmacist with a salary of $72,000
They are looking to purchase a house in the 200,000-225,000 price range. They are paying to use there $12,000 as a down payment.
What is there investment objective for the $12,000 in cash?
Capital Preservation
Diego,a mutual funds dealing rep. is reviewing his notes from a recent client meeting. His client, Linda, wants to retire next year with an annual pre-tax income of $50,000. However she doesn’t have the financial resources necessary to do so. Before his next meeting with Linda, Diego prepares several scenarios for her to review.
1) requires Linda to delay her retirement for another 5yrs
2) requires Linda to accept a pre-tax income of $45,000 per year
3) requires Linda to take greater investment risk with her portfolio.
Diego will discuss these scenarios with Linda to determine which one is appropriate.
Where are Diego and Linda in the strategic investment planning process?
Clarify client status, problem and opportunities
A multi-step process
Suitability process
One of your clients, is a retired senior citizen with a conservative portfolio of around $750,000. He is always on the lookout for investments that can offer him a better yield to supplement his income. In his quest for a higher yield, he comes to your office and asks you to liquidate half of his portfolio and invest the proceeds in a start-up mining company. The proposed trade is entirely unsuitable based on your clients (KYC) information. What is the most appropriate action you should take?
Clear the transaction with your compliance dept. or branch manager
To have detailed knowledge of any product you sell in order to be able to assess the suitability of the product.
Area of responsibility with regards to product knowledge
Why is the KYC ( know your client) rule the single most important rule you must remember when selling securities?
Asking a series of questions, both you and the investor can be assured that the investment recommendations made are appropriate for the investor
TRUE OR FALSE
You may not know enough about the mutual fund to satisfy the KYP requirement
True
Can magnify losses for a client and he or she will still be responsible for repaying the loan with interest whether or not the investment performs.
Dangers of leveraging
What should you do when recommending leverage to the client?
Inform them about the risk and deliver the risk disclosure documents
What are users of capital in the financial markets called
Dealers
TRUE OR FALSE
The secondary debt market is where dealers bring together buyers and sellers of securities
True
This _______ indicates the behaviour of sellers and slopes upward to the right
Supply Curve
Measure of the sum of the market value of all the final goods s d services produces in the economy in a year.
GDP- Gross Domestic Product
** meaning- goods and services sold to their FINAL user
Ex. Windows sold to a home owner
The degree to which investment capital is influenced by changes in financial markets and the overall economy is descriptive of what investment characteristics
Sensitivity
Investment capital has 3 related characteristics, what are they?
Sensitivity- the degree to which investment capital is influenced by changes in financial markets and the overall economy
Scarcity- the limited supply of investment capital
Mobility- ability of investment capital to move around the globe very quickly expansionary
What is expansionary fiscal policy?
The government’s use of taxes, transfer payment and spending to influence the overall level of economic activity
Ex. increasing transfer payments
How do futures contracts differ from option contracts?
Delivery of a future contract is mandatory, while the fulfilment of an option contract is at the discretion of the option buyer
Lowest to highest risk and return
T-bills, municipal short-term papers, bankers’ acceptance (BAs), and commercial papers
What types of preferred shares have rights to a share in the company’s net profits over and above the specified dividend rate?
Participating preferreds
What risk is associated with preferred shares?
They may be redeemed when market conditions are favourable for the issuer
The relationship between yield and term to maturity?
Yield curve
When do T-bill investors receive their interest?
At maturity or redemption
Ease and convince of buying and redeeming mutual funds units
Is it a benefit or disadvantage for mutual funds
Benefit
What is a open ended fund
Continually issue and redeem units with the number of units fluctuating from day to day
What is a closed ended fund
Issue a fixed number of shares to the public and those shares are subsequently traded amongst investors on a stock exchange
The market price is not necessarily equal to the net asset value per share (NAVPS)
The relationship between the net asset value per (NAVPS) and the market price of the shares
What are the features of a global equity fund
Long term capital appreciation and significant potential for gains and losses due to currency fluctuation
Lower management fees than comparable mutual funds
Characteristic of exchange-traded funds (ETFs)
TRUE OR FALSE
Real property funds are more volatile than mortgage funds
True
Real property fund is a _______ fund
Specialty
Invest heavily in equities in the early years and gradually rebalance by reducing equity investments and increasing investments in fixed income securities.
Target date funds
TRUE OR FALSE
Target date funds are appropriate for investors with a short time horizon
False- target date funds are not suitable more aimed at long term
What is strategic asset allocation?
When an investor determines the mix of cash, fixed income, and equities that is appropriate for his or her situation
What is a index fund
Matches its portfolio to that of a specific financial market index
Fixed income fund, balanced fund, equity fund, specialty fund,
Lowest risk and return to the highest risk and return
What does FOFs stand for
Funds Of Funds
What do FOFs do?
- Offer the professional expertise of a portfolio manage from each mutual fund held in the FOFs
- Suitable for investors who don’t have the time or expertise to customize a portfolio of their own.
What normally appears on the income statement
Net profit- shows how much revenue a company earner and the expenses it incurred during a specific period
Portion of company profits retained by the company offer distribution of dividend to shareholders
Retained earnings
What is technical analysis?
Is a method of evaluating securities based on studying past trends in market activity,prices, and volume.
Look for patterns or indications to predict future price movements
What is fundamental analysts
Attempt to predict the future prospects of a company by becoming intimately acquainted with the details of the company.
What is passive investing?
An investment strategy where by the portfolio manger chooses the securities in a mutual fund according to a chose benchmark
What is value investing
And investment strategy whereby the portfolio manager chooses the securities in the mutual fund according to the chosen benchmark
What is active investing
Based on the idea that through the scale and research of the portfolio manager he or she can find securities that I’m not properly price due to market in efficiency
The risk that a single event such as the failure of an institution can trigger the domino effect or harm other interconnected financial institutions
Systemic risk
Also known as market risk
Systemic risk
What does the independent review committee to a mutual fund have the power to oversee and approve
Potential conflict of interest involving the investment of fund manager
It reduces the risk associated with the timing of mutual fund investment. It involves investing the same amount of money in the same mutual fund at regular intervals for example monthly or quarterly
Dollar cost averaging
What expense is not included in the calculation of a mutual fund management expense ratio (MER)
Brokerage fees –they belong in capturing the trading expense ratio (TER)
What time is the cut off for redemption when it comes to the NAVPU (EST/EDT)
4 PM EST/EDT
This plan encourage a display and investing approach and helps investors to avoid the temptation of market timing
Voluntary accumulation plan
It is not mandatory to deliver this to the investor but is available upon request
Simplified prospectus
Where would you go to find information on any investment restrictions
Annual information form
This position facilitates investors mutual fund transactions
The mutual funds distributor
When it comes to at HPB homebuyers plan you must repay a minimum of 1666.67 on a with drawl of 25,000 from her registered retirement savings plan on January 31 year one with within how many years
15
What is the maximum age you can contribute to your own registered retirement savings plan (RRSP)
71 - December 31 of the year you turn 71 is the last day you can contribute to your own RRSP
This will provide a steady stream of income to a person for the rest of their life
Registered life annuity
Mario and Jasmine are a married couple, last year marry you earn $30,000 in employment income and contributed $3500to Jasmine spousal registered retirement savings plan earlier this year Jasmine terminated the plan and withdrew the entire $3500 from the spousal RRSP. Who must declare in taxable income for this year
Mario must declare $3500 – if one makes a withdrawl from the plan. the withdrawl is taxed in the contributors hands and not those of the spouse
Guarantees the annuitant A lifetime income so here she will never outlive the annuity payments.
Single life annuity
And what age can you qualify to receive an allowance such as OAS (Old age security) or GIS (guaranteed income supplement )
Between ages of 60 to 64 but must meet criteria including income test,residency qualifications and citizenship or legal resident status requirements
Your client, has been living in Canada for five years. He is turning 65 this year and is keen to know from you details about the old age security program. What will you tell him?
You must meet test requirements and their OAS pension benefits may be clawed back
How old musubi to be eligible for an OAS pension
65
What tax slips will unit holders in the mutual fund trust receive the inform them of their investment income
T3
Who is eligible for the dividend growth up and credit mechanism
Dividend received from all Canadian companies residing in Canada paying taxable dividends are eligible
True or false Switches between the same fund family do not result in deemed disposition of mutual fund shares are corporate class funds
True
What affect does a return of capital have on the investors net capital gain
It will increase the unit holders capital gain when the units are redeemed
How is foreign income earned threatened for tax purposes under the income tax act
The full amount of foreign dividend and interest income is to be included for tax purposes
Drums taxable income is $50,000. Is federal tax payable is $7,950 and his average tax rate is 15.90%. He discovered that he had an additional $2000 tax deduction that he can use. What impact will this deduction have
It will lower his taxable income by $2000
When did Geo’s clients wants to invest in the freedom North America fund. Geos is not familiar with this fun and wants to do some research on it. How should Geo go about researching the mutual fund
He should review our key information about the mutual fund from disclosed documents and third-party sources
What is a bond mutual fund
Fixed income investment
In a non-registered account, Bob has $25,000 each invested in the following mutual funds:
~ dividend fund
~ bond fund
~ equity fund
~ specialty find
He has unused RRSP contribution room of around $25,000 available and wants to use one of the four mutual funds as a contribution from a tax efficiency view point which of the following mutual funds would be most appropriate for Bob to move into his RRSP
Bond fund
Robert has a portfolio of around $100,000 which she invest in a highly concentrated emerging market mutual fund. He believes that the emerging markets are the markets that one should be in to make money. He doesn’t believe in diversifying into other asset classes and has remained fully invested in the emerging markets. He cities The growth rate of his portfolio as supporting argument. What is the behavioural aspects that Robert is exhibiting
Overconfidence
What is likely to be suitable clients for a balanced fund
Investors looking for income and growth
What is a dividend fund
Regular income stream in the form of Canadian dividence
What is the commonly witnessed behaviour of investor selling the running investments to early and holding their losing investments known as
Disposition effect
What is a conservative investment risk profile
Predictable flow of income
What is a moderate investment risk profile
Regular flow of income and stability. Well still generating some capital growth overtime
What is the balance investment risk profile
Long-term capital growth and stream of regular income
What is a growth investment risk profile
Not comfortable having all investments in equity. Looking for long-term capital growth with some income
What is an aggressive income risk profile
Long-term capital growth and are less concerned with shorter time volatility
What would be considered as an equity
Aggressive investment risk
To whom are you permitted to make an unsolicited phone calls to market new products also known as cold calling if you have signed up on the national do not call list
Someone to whom you already have a business relationship with
Is a self regulatory organization for the distribution side of the Canadian mutual funds industry who are we
MFDA
True or false
ethical conduct means conforming to approve standards
True
True or false
All unethical actions are breaches of the standard of conduct
True
One of your clients is a retired senior citizen with a conservative profile of around $750,000. He is always on the lookout for investments that can offer him the better yield to supplement his income. In the quest for a higher yield, he comes to your office and asked you to liquidate half of his portfolio invest the proceeds in a start up mining company. The proposed trade is entirely unsuitable based on your know your client information. What is the most appropriate action you should take
Clear the transaction with your compliance department or branch manager
Increasing transfer payments are example of what policy
Expansionary fiscal policy
How do futures contracts differ from option contracts
Delivery of a futures contract is mandatory, well the fulfilment of an option contract is at the discretion of the option buyer
What is a example of a money market security
Bankers acceptance also known as BAs
What types of preferred shares have rights to the share in the companies net profit over and above the specified dividend rate
Participating preferreds
What type of risk is evident with preferred shares
They may be redeemed one market conditions are favourable for the Issuer
Janine is interested in the short term investment and is comparing the yield of several products. She is considering a 360 day T-bill that is priced at 79,645. If the face value of the T-bill is $100,000 what is the quoted yells for the T-bill.
2.45%
$100,000 - 97,645 = $2355
2355÷97645 =0.0241
0.0241×365÷360 = 2.45%
Roger own shares at STEL CO Inc. however, he plans on selling them sometime over the next 6 to 9 months. He’s worried that the stock market price may drop during the time. And wants to limit his potential loss. What is the most appropriate recommendation given Rogers concern
Rogers should buy put options on the STELCO stock
What is the main difference between a close ended fund an open ended fund
Open ended funds continuously issue and redeem units on demand to close and fund issues a fixed number of shares
What is a characteristic of exchange traded fund is also known as ETFs
Lower management fees then comparable mutual funds
True or false
Real property friends are more but volatile then mortgage funds
True
Irma is looking for in a mutual fund that can provide her with a long-term capital appreciation. She would also like to the mutual fund to mimic the investment in the S&P/TSX Kompass it index. What mutual fund would be most appropriate
Any index fund
What are retained earnings
Portion of companies profits retained by the company after distribution of dividend to shareholders
Type of analysis focusses on studying past trends and patterns in the stock price and volume history
Technical
On August 31 your client purchased $1000 of the conquest European equity fund at a net asset value per unit of $14. On December 15 of the same year she decides to make another $1000 purchase at the NAVPU of $12. On December 16 the mutual fund distribute to its unit holders $4 per unit. Your clients distributions areautomatically reinvested back into units of the mutual fund how much will she only after the distribution
She will own 232.14 units of the mutual fund
Preferably a male manager chooses the securities in the portfolio in an attempt to replicate a benchmark. What type of investment strategy is this
Passive investing
The failure of a large investment bank resulting in bringing about instability for the entire banking system
SYSTEMIC risk
Your client has recently started working and has invested his entire savings of $5000 in the ABC Canadian Toronto Stock exchange/standard and poor’s equity fund. The mutual fun has a beta of 0.75. What is expected to happen to the return of the mutual fund if the TSX/S & P index or to decline by 20%
The fund would decline by 15% calculated as 20% x 0.75
It reduces the risk associated with the timing of mutual fund investment what is it
Dollar cost averaging
It’s a mutual friend has a front and load of 5%, what is the purchase price per unit paid by the investor if the NAVPU is $10 at the time of purchase
$10.53
Formula equals purchase price of 10.53 is calculated as
$10 Divided by(1-5%)
Door start a registered education savings plan for her newborn daughter this year and could you contributed $3000 to the plan. Her family income is high enough that she does not need to qualify for enhanced Canadian education savings Grant payments. How much will door receive as CESG
$500
You recommend he sings international equity fund for your client Amy. She has invested in mutual funds and stocks for a long time and she’s quite knowledgable about investing. She would like to know if the hasting international equity fund is subject to any investment restrictions where would you go to find this information
Annual information form
Where is the role of a mutual fund distributor
To facilitate investor mutual fund transactions
True or false
Registered annuities may either be life annuities or term certain annuities
True
Ricardo wants to transfer all of his RRSP assets to a registered retirement income fund RRIF. He would like some clarification on RRIFS what would be true about it
Growth of investment in a RRIF is tax sheltered
Fernando turn 71 last week. She has a total assets of $850,000 in her RSP account. She has come to you for guidance about her maturity options. She is very clear on the fact that she is not interested in paying any tax on her hard earned RSP savings at this time what do you tell her
She may roll over her RRSP fund to an RRIF
What affect does a return of capital have on the investors net capital gain
It will increase the unit holders capital gains when the units are redeemed
Minions wife Missy are in the process of purchasing a cottage. Well they’re completing the transactions they want want their funds to earn some interest. The investment must also be short term in nature and provide them with liquidy and safety of principle. Which is fine with me meet their needs
Money market fund.
What is likely to be suitable clients for a balanced fund
Investors looking for income and growth
Ruben is a retired pension are looking to invest in thousand dollars. He is interested in an income streams that receive preferential tax treatment. What would be most appropriate for Ruben
Reliable Canadian dividend fund
What is commonly witness behaviour of investor selling their winning investments she wrote her late and holding onto their losing investments known as
Disposition affect
