test Flashcards
What’s the difference between mutual funds structured as corporations vs trusts?
As corps: investors called shareholders, board of directors governs the fund as well as d2d operations and is elected at general meeting
As trust: Investors known as unitholders, Trusts or trustees govern the fund, Unitholders do not appoint trustees
What is an investment fund manager?
Some funds hire investment manager rather than hiring in house staff. Investment manager can be a wholly owned subsidiary of a parent comapny or corporation. Banks often do this.
What is a portfolio manager?
chosen by investment fund manager based on funds objectives
responsible for investment decisions which are based on the funds prospectus
use specialists to help them m ake decisions
What is the role of the custodian?
safekeeping cash and securities belonging to the fund.
responsible for holding earned income until instructed by investment fund managemetn to make payments or recieve money.
must be seperate form the investment management company
- custodial agreement between fund and custodian outlines how custodian holds assets
What are the 4 options that a custodian can be?
- Canadian chartered bank
- Cad trust company with sharholder equity not less than 10 mil
- Canadian chartered bank or trust comapny with sharholder equity not less than 10 mil
- Thats it theres only 3 it was a trick question gottem
What is the role of a distributor?
Sales and marketing arm of the mutual fund company
What different ways can mutual fund distribution be structured?
- Proprietary or in house
- Dealing reps associated with mutual fund dealer that has distribution agreements with mutual fund companies, reps are employees or agents of MFD
- Stockbrokers employed by investment dealers
- Employees of FIs
What is the role Transfer agent?
maintain register of unitholders and record all transfers, may offer dividend distribution service
usually trust company
what is n independant review committee (IRC)
required by CSA
oversees potential conflicts of interest decisions involving manager
How to calculate navpu
(assets - liabilities)/ units outstanding
What are 3 things required to accurately evaluate securities for NAVPU?
- Record clsoing price of security on market where most frequent trrading occurs
- Setting reliable bid and ask quotations security is not traded
- in case of mortgages - setting rate price that acurately reflects current rates for equivalent mortgages
When is valuation date of purchase?
day after order has been recieved. Orders not recieved after 5pm Eastern time
How long until settlement date?
trade date plus 3 days for mutual funds or day afetr trade date for money market funds
What is a voluntary accumulation plan?
basically a PAC`
What is series T?
t6 pays 6% of funds year end NAVPU
returns provided by means of capital whihc is not taxable
dont have to sell units
What happens if swith from t6 to t8?
redemption of previous series and capital gains tax accrued unless both series held under umbrella mutualf fund corporation
What are 3 important costs related to mutual funds
- MER
- Trailer fees paid by fund to MFDs
- Loads or commisions paid by investors when the buy or sell funds
How is MER calculated?
total annual fund expenses per statemetn of operations/ average net asset valuefor year x 100
What are the components of MER?
Management fee
trailer fees
operating expenses
interest charges and taxes
What are the main documents prepared by mutual fund?
- fund facts
- simplified prospectus
- annual information form
- annual or interim financial statements
- annual or interim management reports of fund performance
What are the rights of investors in regards to fund facts?
can withdraw from agreement to purchase within 48 hours of recieving fund facts document.
What are the ten sections of the fund facts document?
- Quick facts - MER, fund code, start date, value of fund poirtfolio manager
- What does the fund invest in - top 10 holdings, investment mix by industry
- How risky is it - volatility, risk rating, fund not guaranteed statement
- How has the fund performed? y/y returns for past 10 years, best and worst 3 months and average return
- Who is th fund for? who should and should not invest in the fund
- A word about tax - general statement avising potential taxes payable in each registered plan
- hwo much odes it cost - Sales charge option. fund expenses such as MER and treading costs, other fees (short term trading fee, switch fee
- What if I change my mind - righ to withdraw from agreement to purchase, cancel purchase, claim damages
- for more info - contact info link to CSA understanding mutual fund brochure
- there is no 10
What is transiiotn periiod?
2 day time frame where if any changes are made the document must be delivered to client
What is the simplified prospectus?
prospectus required to befiled and approved by regulators
simplified prospectus covers :
- general risk of investing as well as fund specific risks
- fees and expenses payable by the fund
- compensation to dealers
- organization and management of the fund
- fundamental investment objectives
- investment strats
- legal rights of investors
What is the annual information form?
Supplements info in simplified prospectus. Includes:
- investment restrictions
- description of units in the fund and their characteristics
- methods used to value securities
- details of service providers
- conflict of interests
- fund governance including mandate adn responnsibilities of IRC
What’s the difference between client name accounts and nominee name accounts?
Client account: Client is legal/registered owner of the mutualf fund
Nominee: Dealer is the legal/regiswtered owner of the account
What is the lifetime maximum for the RESP?
50k per beneficiary
What is the Canadian Education savings grant?
available until the end of the year a child turns 17
govt matches first 20% of 2500 annually
can cathc up in future years and accumulate room of 500 per year up to a max of 7200 but you cant recieve more than 1000 per year
What is the additional canada education savings grant
for low income families payable on the first 500 annula contribution.
20% for under 40k 10% for between 43k and 87k
What is the Canada Learning Bond?
Additional money for those that earn the national child beenfit supplement
500 payable immediately and 100 per year until the child is 15 plus 25 right away to help cover cost of opening RESP
What is the CSA and it’s purpose?
Canadian securities act is a policy body composed of members from each securities regulator. Has 3 goals:
- protect investors from unfair or fraudulent practices
- foster fair and efficient capital markets
- reduce risks to markets integrity and investor confidence
What is MFDA?
Mutual Fund Dealers Association - self regulatory organization for distribution. responsible for regulating operations, standard practice and business conductof it’s members and dealing reps.
empowered by securities regulators to:
1. Admit members
2. perform compliance reviews
3. enforce rules through transparent disciplinary process
also protects customer losses as result of MFDA members insolvency through MFDA invesstor protection corporation
What is OBSI?
Ombudsman for Banking Services and Investments is an independant and impartial organization whose objective is to attempt to resolve disputes between investment firms and clients. All dealers and advisors are part of group.
What is IIROC?
Investment Industry Regulatory organization of Canada is a self regulatory organization for investment dealers which:
- protecs investing public
- self regulates
- liaison with provincial securities commisions
- public policy representation
- Maitenence of orderly market and trading
- education
- publication of statistical information
- liaison with other FIs
What is OSFI?
Office of the Superintendent of Financial institutions Canada is the primary supervisor and regulator of insurance companies, deposit taking institutions and pension plans - does not regulate MFs or MFDs.
mandate to:
1. protect the rights and interests of depositors, policyholders, pension plan members and creditors of financial institutions.
2. contribute to confidence in Canadian financial system
What is FINTRAC?
Financial transactions report and Analysis center of Canada - helps detect and prevent money launders and terrorist financing. MFDs are required to:
- report to FINTRAC
- keep records
- confirm clients identity
- identify politically exposed foreign persons
What is PIPEDA?
Personal Information and Electronic documents act - has rules for safeguarding personal information collected by companies
What are the MFDA standard of conduct rules?
- Deal fairly, honestly and in good faith
- Observe high ethical standards
- refrain from engaging in unbecoming business
- Do not say anything detrimental to public interest
What are the major componenets of KYC?
- Risk tolerance
- Investment objectives
- Time Horizon
- Investment knowledge
- Age
- Net Worth
- Annual income
- Occupation
What is term to maturity?
refers to the length of time between current date and maturity date.
What are t-bills?
Short term securities issued by govt at discount. No interest rate.
What is the T-bill return calculation?
Quoted yield = (((Face value - price) /price) x (365/term to maturity)) x 100
What are bankers acceptances?
fixed income securities that are issued by corporations adn guaraneteed by a bank. Corp uses credit rating of major bank to lower it’s borrowing costs
What are debentures?
like bonds but not secured by assets - just reputation
What are convertible bonds?
bonds that offer investors option to convert to common shares at pre-set price within specified time frame. Usually has lower coupon rate due to the option
What are callable bonds?
(redeemable bonds) allow borrower to buy back the bond
What are retractable bonds?
aLLOW BONDHOLDER TO REDEEM THE BOND AT PAR BEFORE MATURITY DATE
Are taxes charged on zero coupon bonds (discount bonds)
yes. Interest accrues each year and investors pay tax on it.
What are mortgage bonds?
fixed income securities that invest in a pool of mortgages. CMBs are invested in pool of mortgage backed securities.
What is the bond return calculation?
Current yield = (coupon payment/Market price) x 100
Does current yield fluctuate with interest rates?
Yes
What is yield to maturity?
annual return if bond is held to maturity
What is current yield?
the coupon payment as a function of bond market price
What are preferred shares?
Hybrid between bond and equity securities as they provide a regular stream of income. First claim on assets in case of bankruptcy
What are the 5 different kinds of preferred shares?
- convertible pf - option to convert to common shares
- Particpiating pf - offers opportunity to recieve additional dividends if the companies profit exceeds stated level
- Cumulative preferred shares - unpaid dividends accur and paid in full before dividends paid to common shares (non cumualtive do not carry forward)
- Callable preferred shares - allows the issuer to redeem preferred shaes at pre-determined price within given time period
- Retractable preferred shares - entitles shareholders to sell sharesback to issuer at pre-determined price in the future
What are derivatives?
financial instrumentss that get their value form one or more underlying asset such as stocks, bonds, interest rates and currencies.
What are the 3 main types of derivatives?
- OPtions
- Future contracts
- Forwards contracts
What is hedging?
take an offsetting position such as entering an agreement with another party to sell or buy with another party at a predetermined price. ie farmers hedge by enetering into a derivative contract to sell beans at a certian profit margin
What are options?
derivative contracts the right to buy and sell a predetermined amount of a security at a set price for a set time
What are call-options?
Allows the option buyer to buy at underlying price
What are put options?
right to sell an underlying security at set price
What are future contracts?
intended to solve basic business risk of price uncertainty. Contract to set a pre-determined price for a good to be delivered at a specific time. Future contracts are different than options becasue there is an obligation to buy or sell underlying asset. Buyers o ffuture contracts are long on the commodity where sellers are short on the commodity.
What are forward contracts?
agreement that allows the buyer to purchase an underlyijng asset such as stocks, bonds or currency.
Whats the difference between future an dforward contracts?
Forward contracts - traded by stockbrokers, customized between buyers and sellers, no clearinghouse so defaults possible
Futures contract - Traded on futures exchange, standardized contracts, clearinghouse that ensures contract is foollwed through
How are derivatives used in mutual funds?
often to hedge against currency risks
What are labour sponsored funds?
funds that provide investment funds for start-ups. Helped along with 15% tax credit on max $5000 per year investment.
Whats a refundable tax credit?
The best kind of tax credit. credit paid directly to an individual such as GST credit and if there is no tax to reduce it comes out as a refund
How do you do a tax credit calcualtion?
adds up tax credits and multiply it by the lowest marginal tax rate
What is dividend gross-up and tx credit?
the mechanism for which eligible (from large public Cad corps) and non-eligible (Candian controlled private corp) dividends are taxed at a lower rate the foreign dividends
How is tax calculated on eligible dividends?
tax * (gross up - tax credit)
Is there a holding tax for foreign foreign income?
yep eg. 10% withholding tax on US interest income and 15% for dividend income.
How much capital income (loss) taxed (deducted)?
50%
How long can capital losses be carried forward?
3 years
What are the 2 ways mutual funds produce taxable income?
- Distributions
2. Redemptions
How are capital losses calculated in mutual funds?
They are not distributed by mutual funds. capital losses are used to offset capital gains within the mutual fund (net capital gain). Capital losses are carried forward indefineitely until they have offset capital gains. Capital losses can only be realized from redemptions
What happens if mutual funds do not distribute all it’s income?
taxed at highest tax rate
How does tax work for mutual funds as corporations?
MF must file tax return and pay tax on it’s investment income. Then it files to retrieve the tax so that the income can flow to the investor. There is no refund for interest and foreign income within mutual fund corporation - it only comes out as a dividend
How are redemptions taxed when switching from one mutual fund to another?
In trust - triggers deemed disposition which is calculated as redemption (capital gains tax)
MF corp - tax consequences are delayed - no immediate redemption triggered.
What is return of capital?
When the fund pays more than it earned for the year to investors it does not create a taxable dividend on the difference between disbursement and earned amount, Instead it increases capital gains when units of the fund are sold by the difference
