SF CH 3

Question 1

What is the difference between direct and indirect investing?

Answer 1

1. Direct Investing means that you directly own the various investments in the portfolio.
2. Indirect Investing means that you own the securities indirectly through ownership in an investment fund of some kind.

Question 2

When are investment funds ideal for investors?

Answer 2

1. Investors with capital bases who cannot properly diversify on their own.
2. Investors who do not have adequate time to manage their own investments.
3. Investors who do not wish to manage their own portfolio.

Question 3

What is an investment fund?

Answer 3

A financial company or trust fund that sells shares in itself and uses the funds to invest in a portfolio of securities.

Question 4

What are the 3 different types of investment funds?

Answer 4

1. Unit Investment Trusts
2. Closed-End Investment Funds
3. Open-End Investment Funds

Question 5

What is a Unit Investment Trust?

Answer 5

This is an unmanaged, fixed income security portfolio put together by a sponsor and handled by an independent trustee.

Question 6

What are Closed-End Investment Funds?

Answer 6

This usually sells no additional shares after the initial public offering (IPO) and has a fixed capitalization. The shares of a closed-end fund trade in the secondary markets.

Question 7

What are Open-End Investment Funds (mutual funds) and give some characteristics?

Answer 7

This is an investment fund whose capitalization constantly changes as new shares or trust units are sold.

1. Shares of a open-end fund is not listed in the stock exchange.
2. Units may be sold back to the trust (redeemed) or fund.

Question 8

How can you purchase mutual funds?

Answer 8

1. Directly from a fund company by mail, telephone, or at office locations.
2. Indirectly from a sales agent, including securities firms, banks, life insurance companies and financial planners.

Question 9

What is Net Asset Value Per Share?

Answer 9

Total market value of the fund’s security portfolio. Less any debt or other liabilities divided by the total number of units outstanding.

Question 10

What is the Net Asset per share calculation?

Answer 10

Total Assets of the mutual fund – Total liabilities of the mutual fund divided by Units outstanding held by investors.

Question 11

What are the two major types of mutual funds?

Answer 11

1. Money market mutual funds

2. Equity and bond and income funds

Question 12

What are money market funds and what are their objectives?

Answer 12

These are open-end investment funds whose portfolios consist of money market instruments. The objective is to achieve a high level of income and liquidity through investment in short-term money market instruments.

Question 13

What are Mortgage Funds?

Answer 13

These are open-end investment funds that are riskier than money market funds because the terms of investments may be five years or greater, so there is more interest rate risk. The money of investors is lent out as mortgage loans to new homeowners.

Question 14

What are the objectives of bond funds?

Answer 14

Primary goals are income and safety. They are still subject to capital gains and losses due to inherent interest rate risk.

Question 15

What are dividend funds and its objectives?

Answer 15

Dividend funds are companies that invest primarily in shares that pay dividends. The objective is to increase after tax income because of the favourable tax treatment of dividend income.

Question 16

What are balanced funds and its objectives?

Answer 16

Balanced funds are companies that invest in both stocks and bonds usually at 60% assets and 40% bonds allocation. The main objective is provide a mixture of safety, income and capital appreciation.

Question 17

What are asset allocation funds?

Answer 17

Funds that are similar to balanced funds but does not have the restrictions of minimum percentages.

Question 18

What are Equity or Common Stock Funds and its objectives?

Answer 18

Funds that primarily invests of stocks and the primary objective is capital gain.

Question 19

What are Index Funds and its objectives?

Answer 19

Funds that invest primarily on stocks and bonds to mirror the performance of a market index such as the S&P TSX Composite Index or the ScotiaMcLeod Bond Index. They have much lower fees than other actively managed funds.

Question 20

What are Specialty Funds and its objectives?

Answer 20

Funds that invest on companies on a specific industry or segment. Their objective is for capital gains.

Question 21

What are Real Estate Funds and its objectives?

Answer 21

Funds that invest on income-producing property. Objective is to achieve long-term growth through capital appreciation and the reinvestment of income.

Question 22

What are Hedge Funds and its objectives?

Answer 22

These are professional managed portfolios that are sold to wealthy investors

Question 23

What are Ethical Funds and its objectives?

Answer 23

These funds are guided by moral criteria that may prevent the funds from investing in companies that produce tobacco.

Question 24

What are exchange traded funds?

Answer 24

This is an index fund that holds a diversified portfolio of securities, priced and traded on public exchanges. But instead of buying shares from an investment fund company, you are buying from an investor.

Question 25

What are the differences between ETFs and mutual funds?

Answer 25

1. ETFs: traded all day on exchanges and can be bought on margin and can be sold short. Most are passive and not actively managed, has lower fees.
2. Mutual funds: not listed on an exchange, most are actively managed and higher fees.

Question 26

What are segregated funds?

Answer 26

Sold by life insurance companies can must guarantee that a minimum percentage of investor’s contributions will be returned at the fund maturity.