revision Flashcards
According to the Interest Rate Act, how frequently can interest be calculated on a mortgage?
A. Interest must not be compounded more frequently than semi-annually.
B. Interest must be compounded more frequently than semi-annually.
C. Interest must not be compounded more frequently than annually.
D. Interest must be compounded monthly.
A.
How long can business investment losses be carried back and forth?
Business investment losses can be carried back 3 years and forward 10 years
How does death benefit receive impact taxes?
A. The full death benefit amount is included in his income for the year.
B. The first $10,000 of the death benefit is not included as income in the year of death.
C. The first $2,500 of the death benefit is not included in his income for the year.
D. None of the death benefit amount is included in his income for the year.
B. The first $10,000 of the death benefit is not included as income in the year of death.
A client is planning a move to another province but is concerned about the tax implications based on which date she becomes a resident of the new province. What date determines where the client will pay taxes?
The clients place of residence on December 31 determines the province in which she pays provincial tax.
Which clause is designed to encourage clients to have adequate insurance against a commercial property?
A. Commercial insurance clause.
B. Cooperative insurance clause.
C. Property insurance clause.
D. Coinsurance clause.
D.
What are the 5 key assumptions of market theory FP 2 (3)
- Risk aversion
- investors are risk adverse and will only take on more risk if they get higher returns - Time Horizon
- assumes all investors will hold the investments for the same time - Expected Returns
- assumes that investors have the same expectations of fluctuations in future levels of returns from various investments - Borrowing Rates
- it assumes that they are able to borrow at the prevailing risk-free rate - Perfect Market
- securities can be bought at the equilibrium
PPN (Principal Protected Note)
- Offer unique risk-reward characteristics
- Debt instrument that delivers return in the form of interest, but tied to an underlying asset
- Amount of interest is unknown, guarantee that principal will be given back at maturity
- Do not qualify for CDIC
- Term to maturity is 3-8 years
What is the primary difference between “divorce” and “annulment”
Divorce: the marriage was valid at one point, but now has ended
Annulment: The marriage was null and void from the start because of facts existing at the time of marriage, also called a nullity decree
How do you calculate Intrinsic Value
Dividend Discount Model
Dividend one year from now/ (Required rate of return- growth rate of dividend)
3 reasons to include hedge funds in portfolio
- increase return without increasing risk
- reduce risk without reducing returns
- increase absolute return nature if the portfolio to make it more resistant to capital erosion during market downturns
What is the difference between tenancy in common and joint tenancy
Tenancy in Common: deceased shares are transferable to heirs
Joint Tenancy: deceased shares transferable to surviving co-owners
What is percentage-of-portfolio approach
What is calendar approach
Percentage-of-portfolio approach: rebalancing the portfolio if the classes move away from the SSA more than a specified percentage
Calendar Approach: Rebalancing the portfolio at regular intervals
What is the performance measurement and the performance appraisal
Performance Measurement: Calculating the return realized by a portfolio
Performance Appraisal: Assessment of how well a portfolio has done over the evaluation period
Holding Period Return
Weighted Average
Holding Period Return= (Ending Value- Beginning Value + Income)/ Beginning Value
Weighted Average= (Fund 1 X return) + (Fund 2 X return)…
Jensen’s Alpha Formula
Jensen’s Alpha= Average Return- Risk Free Rate- (Beta X (Market Return- Risk Free Return))
What type of risk does standard deviation represent
Total risk
What is Absolute Valuation and what is Relative Valuation
Absolute Valuation: Determines a price estimate or precise intrinsic value of a stock based on company fundamentals
Relative Valuation: Determines an intrinsic value by comparing one or more company’s value ratio to a benchmark for similar companies
Physical-Based ETFs
Future-Based ETFs
Equity- Based ETFs
Physical-Based ETFs
- invests directly into commodities
- closely math the spot price
- ex: gold and silver
Future-Based ETFs
- invests in future contracts of different commodities
- subject to “roll yield loss”–> maturing future contract is rolled into new future contracts at higher prices
Equity-Based ETFs
- invests in shares of listed public companies
Fisher Equation
[(1+ nominal rate of return)/ (1 + expected inflation rate)]- 1
Statement of Comprehensive Income
Statement of Financial Position
Statement of Cash Flows
Statement of Changes in Equity
Statement of Comprehensive Income: shows the company’s revenue and expenses over a specified period
Statement of Financial Position: lists a companies assets, liabilities and equity at a specific point in time
Statement of Cash Flow: shows the actual sources of cash (inflow) and uses of cash flow (outflow) for the company over a period of time
Statement of Changes in Equity: shows how much of a companies earning are retained
- revenues must match the revenue generated
- provide a link between the statement of comprehensive income and the statement of financial position
How does a GMWB differ from a traditional segregated fund?
it offers an income guarantee
How is trust income taxed to the beneficiaries
it is taxed in the beneficiaries hands but maintain its original character for tax purposes
How long does the CPP contributor have contributed to the CPP for the spouse to be entitled to CPP survivor benefits?
3 years
Given the following information what is ABC’s Jensen Alpha?
ABC Fund Beta: 1.2 TSX Index Return: 10% T-Bill Rate: 2% Inflation: 2% Terms of Trade: 4% ABC Actual Return: 15% Risk Free Rate: 3%
- Market (Index) Return- Risk Free Rate
10%- 3%= 7% - Multiply by Beta
7% x 1.2= 8.4% - Add risk free rate back in
- 4% + 3%= 11.4%
The managers expected return was 11.4% however he actually did 15%, the difference is the value added
- Jansen’s Alpha= actual return- expected return
15%-11.4%
=3.6%
What is the Fisher Equation?
Nominal Rate: 4%
Inflation Rate: 2%
Real Rate= [(1 + nominal rate)/ (1 + inflation rate)] -1 = [( 1+ 0.04)/ (1-.0.02] -1 = (1.04/ 1.02) -1 = 1.0196- 1 = 0.0196 ( 1.96%)
What retirement investment option does one have if they are self employed or does not participate in employer- provided pensions
a. DRIP
b. EPP
c. RESP
d. PRPP
PRPP (Pooled Registered Pension Plan)
PRPP are offered by financial institutions who will administer the plan and at the same time accept a fiduciary duty to the plan holder
Alter Ego Trust
- a living trust (set up while the testator is alive)
- can only be established by someone 65 or older
- transfers ownership to the trust while maintaining the right to use the assets during their life time
- upon death it is similar to the will as it sets out how the assets should be distributed
Stu invested $125000 in Jan he then deposited another $20000 in June and withdrew $15000 in Oct. At the end of the year the market value was $136500. What is his return?
Holding Period Return
ending value- beginning value- net contributions/ beginning value + contributions
= 136500- 125000- 20000 + 15000/ 125000+ 20000
= 6500/ 145000
= 4.48%
A hedge fund has a semi-annual standard deviation of 4% what is the effective annual standard deviation
Standard Deviation x the square root of the number of period in 1 year
= 4% x square root of 2
= 4% x 1.4142
= 5.66%
The Retirement Planning Process
- Determine Client’s Objectives
- Determine Client’s Financial Situation
- Estimating the level of retirement income needed and where it will come from
- Establishing a plan to meet those retirement needs
- Monitoring and reviewing the plan
What is the target rate for inflation
1-3%
What are the 4 categories of Financial Ratios
Liquidity
Operating Performance
Value
Risk Analysis
What is the difference between Divorce Order and Divorce Certificate
Divorce Order: When the judge grants the divorce
Divorce Certificate: when you are allowed to get legally married again
What is an Instalment Refund Life Annuity
What is an Life Annuity Cash Refund
Instalment Refund Life Annuity: guarantees that if the annuitant dies before receiving the full premiums then the payments will continue to the beneficiaries until the refund has been refunded
Life Annuity Cash Refund: the remaining refund will be paid out in a lumpsum
How much insurance does Sara need based on the following information:
House- $600,000 (cost $150,000)
RRSP- $250,000
Life Insurance- $300,000 (daughter is beneficiary)
Investments- $500,000 (cost $100,000)
MTR 40%
- house will have pre so it doesn’t need to be included
- life insurance will flow directly to beneficiary
- RRSP ($250,000) + Investments [($500,000- $100,000) x 50%]
- $250,000 + $400,000 x 50%
- $250,000 + $200,000
- $450,000 x 40%
- $180,000
What are the minimum mortgage down payments for high ratio mortgage
first $500,000- 5%
next $500,000- 10%
$1,000,000>- 20%
What is a “specified plan” when it comes to RESP’s?
an individual RESP where the dependent is considered disabled
Stop Loss Rules
prevent the creation of loss on transfers of property between non-arm’s length person
What happens if an annuity was purchased before 1989 vs after 1989
- after 1989 interest must be reported in the year it was earned, this will attract tax regardless if interest was received
- before 1989 taxation can be deferred up to 3 years
A person who has been declared bankrupt has limited contractual capacity. At what point is full contractual capacity restored?
After a discharge has been received
Andrei, age 62, receives CPP benefits of $12,750 annually and has a marginal tax rate of 41%. His wife Alina, age 61, receives $5,040 in CPP benefits and has a marginal tax rate of 20%. Recommend a strategy to maximize after-tax retention of these funds
A. Alina and Andrei applies jointly for Assignment of Benefits.
B. Alina waives her right to a Survivor’s Pension.
C. Andrei assigns a Retirement Pension Supplement to Alina.
D. Andrei applies for Division of Credits.
A.
If Alina and Andrei apply jointly for Assignment of Benefits, they can distribute the CPP income Spouses in an ongoing relationship can apply to share their CPP/QPP retirement pension payments, as long as both are at least 60 and receive a CPP pension.
What is the difference between shared parenting and joint custody
Shared parenting is the term generally applied to parenting schedules that meet a certain threshold under section 9 of the Child Support Guidelines; namely, that each parent has the child in his or her care at least 40% of the time. Joint custody usually refers to a parenting arrangement in which the parties share major decision-making relating to the child and does not necessarily refer to a shared residency schedule.
What is the difference between the assets approach and the earnings approach of business valuation?
The assets approach tends to be used to value a business entity that will not be sold as a going concern. This approach involves the separate valuation of the individual assets. The earnings approach to valuation treats the business as a going concern. Generally, when purchasing a business, the buyer is making an acquisition of assets that will generate future earnings or a cash stream.
How do you complete a retirement needs analysis
- Estimate the expected expenses at retirement, in today’s dollars.
- Project these expected expenses to the client’s expected retirement year, using the assumed inflation rate.
- Calculate the required before-tax income to meet those expenses, using the client’s average tax rate.
- Determine how much must be accumulated to generate the desired level of income.
What is a Henson Trust
- The portion of their estate that is meant for Jonathan can be held in trust for his entire lifetime.
- The Trustee(s) or personal representative have complete discretion in deciding whether to pay out any income or capital to Jonathan and may use the funds for any purpose that is in his best interest.
- The trust does not reduce the amount of government benefits and entitlements that Jonathan is eligible to receive.
john has a $15000 GIC earning 6% he also has a $11000 car loan where he is paying 7%, his marginal tax rate is 45%.
What is the minimum rate of return he needs if he wants to cash in his GIC?
Minimum rate of return= loan rate/ 1- MTR = 7%/ 1- .45 =0.07/0.55 =0.127 = 12.7%
