IFIC - EXAM 1 PRACTICE QUESTIONS & ANSWERS
What does it take for an investment to maintain its purchasing power? - Answers -
Purchasing power is the ability to buy goods and services.
To maintain purchasing power means that your dollar must grow (or generate a nominal
return) at least equal to the rate of inflation. If inflation is 5% and your nominal return is
5% then you will just maintain purchasing power. Adjusting that 5% nominal return for
the 5% inflation rate implies a real return needed to maintain purchasing power of 0%.
Time Weighted Return - Answers -TWR = [(1 + r1) (1 + r2)] ½ - 1
Ie. Two year returns; 12.50% and 5.00%
TWR = [(1 + .1250) (1 - .05)] ½ - 1
= [1.125 × .95] ½ - 1
= [1.06875] ½ - 1
= 1.0338- 1 = .0338 or 3.38%
Clawback - Answers -the required repayment of social benefits by taxpayers whose
income is above a certain threshold
Keegan over-contributes to his Tax-Free Savings Account (TFSA). What penalty rate
will be applied to his excess contribution amount until it is withdrawn? - Answers -1%
per month
Karen works Monday to Wednesday for a member of the MFDA as a dealing
representative and Thursday and Friday as a language instructor at a local college.
Client orders received on Thursdays and Fridays are held until Karen returns to work
the following week. What condition of dual employment that is violated under these
circumstances. - Answers -The dealer must maintain procedures to ensure continuous
service to clients.
Why do speculators tend to avoid diversification? - Answers -Diversifying a portfolio
tends to reduce the probability of very large gains and losses.
Key differences between marketable government bonds and treasury bills. - Answers -
Treasury bills do not pay any coupon interest & generally sold at a discount
Identify the individual or group that has ultimate responsibility for the fund's activities,
including ensuring that the fund's investments are in keeping with the fund's investment
objectives. - Answers -Board of Directors (ULTIMATE RESPONSIBILITY)
A fund manager has diversified the equity portfolio he manages in order to reduce the
potential negative impact of unfavourable information relating to any one stock.
Determine the type of risk he has reduced. - Answers -Unique Risk
, Relationship between money-market funds and interest rates - Answers -The value of
short-term debt securities is not very sensitive to changes in interest rates. Money
market securities, and money market funds, are expected to have a low amount of
volatility (risk). Their returns reflect changes in short-term interest rates, moving up as
interest rates rise, and down as they fall
What mutual fund is most appropriate for an objective of safety of capital. - Answers -
Money Market
Hedge Fund Strategies - Answers -1) Relative value strategies: attempt to profit by
exploiting inefficiencies or differences in pricing of related stocks/bonds/derivatives. Low
or no exposure to market direction and return based on manager skill
2) Event driven strategies: seek to profit from unique events such as mergers,
acquisitions, stock splits and stock buybacks. Medium exposure to market direction
3) Directional strategies: bet on anticipated movements in market prices of equities,
debt securities, foreign currencies and commodities. High exposure to market
Perpetual preferred shares - Answers -This is a preferred share without a maturity date
therefore more sensitive if not most, to interest rate risk
ABC Fund charges an acquisition fee (front-end load) of 3%. Calculate the load as a
percentage of the net amount invested for a fund with a NAVPS of $15. Round to 3
decimal places. - Answers -The front-end load is $15.00 × 0.03 = $0.45. The net
amount invested is $15.00 - $0.45 = $14.55.
The front-end load expressed as a percentage of the net amount invested would be
$0.45 ÷ $14.55 = 0.03093 = 3.093%.
What type of income that can be reduced for tax purposes by a capital loss. - Answers -
By Capital Gains. (Capital losses can only be deducted from capital gains and nothing
else.)
Describe the role and objectives of the Mutual Fund Dealers Association (MFDA) -
Answers -To protect Canadian mutual fund investors and ensure that they have the
same level of protection regardless of the mutual fund dealer
or dealing representative they deal with.
List and distinguish among the prohibited mutual fund sales practices. - Answers -1.
Quoting a future price
2. Offering to repurchase a security
3. Selling without being registered
4. Advertising one's registration
What does it take for an investment to maintain its purchasing power? - Answers -
Purchasing power is the ability to buy goods and services.
To maintain purchasing power means that your dollar must grow (or generate a nominal
return) at least equal to the rate of inflation. If inflation is 5% and your nominal return is
5% then you will just maintain purchasing power. Adjusting that 5% nominal return for
the 5% inflation rate implies a real return needed to maintain purchasing power of 0%.
Time Weighted Return - Answers -TWR = [(1 + r1) (1 + r2)] ½ - 1
Ie. Two year returns; 12.50% and 5.00%
TWR = [(1 + .1250) (1 - .05)] ½ - 1
= [1.125 × .95] ½ - 1
= [1.06875] ½ - 1
= 1.0338- 1 = .0338 or 3.38%
Clawback - Answers -the required repayment of social benefits by taxpayers whose
income is above a certain threshold
Keegan over-contributes to his Tax-Free Savings Account (TFSA). What penalty rate
will be applied to his excess contribution amount until it is withdrawn? - Answers -1%
per month
Karen works Monday to Wednesday for a member of the MFDA as a dealing
representative and Thursday and Friday as a language instructor at a local college.
Client orders received on Thursdays and Fridays are held until Karen returns to work
the following week. What condition of dual employment that is violated under these
circumstances. - Answers -The dealer must maintain procedures to ensure continuous
service to clients.
Why do speculators tend to avoid diversification? - Answers -Diversifying a portfolio
tends to reduce the probability of very large gains and losses.
Key differences between marketable government bonds and treasury bills. - Answers -
Treasury bills do not pay any coupon interest & generally sold at a discount
Identify the individual or group that has ultimate responsibility for the fund's activities,
including ensuring that the fund's investments are in keeping with the fund's investment
objectives. - Answers -Board of Directors (ULTIMATE RESPONSIBILITY)
A fund manager has diversified the equity portfolio he manages in order to reduce the
potential negative impact of unfavourable information relating to any one stock.
Determine the type of risk he has reduced. - Answers -Unique Risk
, Relationship between money-market funds and interest rates - Answers -The value of
short-term debt securities is not very sensitive to changes in interest rates. Money
market securities, and money market funds, are expected to have a low amount of
volatility (risk). Their returns reflect changes in short-term interest rates, moving up as
interest rates rise, and down as they fall
What mutual fund is most appropriate for an objective of safety of capital. - Answers -
Money Market
Hedge Fund Strategies - Answers -1) Relative value strategies: attempt to profit by
exploiting inefficiencies or differences in pricing of related stocks/bonds/derivatives. Low
or no exposure to market direction and return based on manager skill
2) Event driven strategies: seek to profit from unique events such as mergers,
acquisitions, stock splits and stock buybacks. Medium exposure to market direction
3) Directional strategies: bet on anticipated movements in market prices of equities,
debt securities, foreign currencies and commodities. High exposure to market
Perpetual preferred shares - Answers -This is a preferred share without a maturity date
therefore more sensitive if not most, to interest rate risk
ABC Fund charges an acquisition fee (front-end load) of 3%. Calculate the load as a
percentage of the net amount invested for a fund with a NAVPS of $15. Round to 3
decimal places. - Answers -The front-end load is $15.00 × 0.03 = $0.45. The net
amount invested is $15.00 - $0.45 = $14.55.
The front-end load expressed as a percentage of the net amount invested would be
$0.45 ÷ $14.55 = 0.03093 = 3.093%.
What type of income that can be reduced for tax purposes by a capital loss. - Answers -
By Capital Gains. (Capital losses can only be deducted from capital gains and nothing
else.)
Describe the role and objectives of the Mutual Fund Dealers Association (MFDA) -
Answers -To protect Canadian mutual fund investors and ensure that they have the
same level of protection regardless of the mutual fund dealer
or dealing representative they deal with.
List and distinguish among the prohibited mutual fund sales practices. - Answers -1.
Quoting a future price
2. Offering to repurchase a security
3. Selling without being registered
4. Advertising one's registration
