SEGREGATED FUNDS ANNUITIES ALL SETS
ANSWERS AND QUESTIONS SET A+
✔✔Interest Rate Risk
LLQP - SFA VL 21 - ✔✔Interest Rate Risk (assume interest rates are increasing)
1. The market value of any fixed income investment currently owned would likely
decline.
It is no longer attractive because newer investments are being issued with higher
interest rates.
2. If you have a locked-in investment, you will have to wait until that investment matures
before you can reinvest at higher interest rates.
✔✔Credit Risk (Default Risk)
LLQP - SFA VL 21 - ✔✔Credit Risk (Default Risk) is the risk that the issuer will default
on promised payments.
The issuer of a bond could default on an interest payment or even on the principal
payment at maturity.
No matter how attractive the features of the bonds are, the bond is worthless of the
issuer is unable to unwilling to pay.
✔✔Inflation Risk (Purchasing Power Risk)
LLQP - SFA VL 21 - ✔✔Imagine an investor so afraid of risk, he was just going to put
his money under a pillow. Over time, his money would lose purchasing power.
Real return= Rate of Return - Inflation
= 10% - 2%
= 8%
,✔✔Liquidity Risk
LLQP - SFA VL 21 - ✔✔Liquidity Risk is the risk that an investment cannot be liquidated
or sold quickly without the loss of capital.
E.g. $10,000 Cash in an Bank Account.
This is a very liquid investment because it can
be accessed quickly with concern for the
market value.
E.g. Ownership of a Rental Property
An illiquid investment as it would take time for
it to sell.
✔✔Foreign Exchange Risk
LLQP - SFA VL 21 - ✔✔Foreign Exchange Risk is the risk of losses due to changes in
exchange rates.
E.g. if you invest $10,000 in U.S. stocks and those stocks perform well, you could still
lose money if the Canadian dollar changes relative to the U.S. dollar
✔✔Tiered Tax System
LLQP - SFA VL 22 - ✔✔
✔✔LLQP - SFA VL 22 - ✔✔Marginal Tax Rate: The tax rate you will pay on the next
dollar of income.
Effective Tax Rate: A combination of all your different tax rates. The weighted average
tax rate.
For example,
- $1,000 in bon interest
- Assume the interest is earned last (i.e. it's earned on top of all other income)
- Therefore, we would use the marginal Tax Rate when determining the amount of tax
✔✔RRSPs (Registered Retirement Savings Plan)
LLQP - SFA VL 23 - ✔✔1. RRSP contributions are deducted from incom, resulting in
immediate tax savings.
Example:
- 50% Marginal Tax Rate (MTR)
- $5,000 RRSP contribution
Tax savings =RRSP contribution x MRT= $5,000 x 50%=$2,500 saving
, 2. investment income within an RRSP is sheltered from taxation.
3. RRSP withdrawals are subject to taxation at the investor's full marginal tax rate.
- usually this happens in retirement, and because you are not working you are in much
lower tax bracket
✔✔In the year you turn 71 yearas old,
LLQP - SFA VL 23 - ✔✔1. Withdrawal the funds as a lump sum (NOT TAX EFFICIENT)
2. Transfer the funds to RRIF and withdrawal gradually. Youh must transfer RRSP
funds to a RRIF by December 31str of the year you turn 71.
✔✔What are two rules associated with RRIFs
LLQP - SFA VL 23 - ✔✔1. Once the RRIFs is established, minimum annual withdrawals
are required to allow CRA tro begin taking the registered savings. This minimum
amount ensures that money lasts throughout your retirement but is largely withdrawn by
the age 90.
2. Don't open a RRIF until you need the income. You can estable RRIF at any age but
usually it makes sense to wait because once you established, you are forced to take out
certain amount each year whether you need the income or not.
✔✔There are two categories of pension
LLQP - SFA VL 24 - ✔✔1. Defined Benefit Plan
2. Defined contribution Plan (MOney Purchase Plan)
✔✔Defined Benefit Plan
LLQP - SFA VL 24 - ✔✔What is known?
1. The end benefit (or the formula to determine the end benfit)
2. The employee's contribution.
What is unknown?
1. The employer's contribution.
i.e. the employer has guaranteed a future benefit
and will have to contribute whatever it takes to
make that benefit possible.
With this type of plan, the company may be called upon to contribute more because the
plan is udnerfunded.
✔✔Defined Contribution Plan
ANSWERS AND QUESTIONS SET A+
✔✔Interest Rate Risk
LLQP - SFA VL 21 - ✔✔Interest Rate Risk (assume interest rates are increasing)
1. The market value of any fixed income investment currently owned would likely
decline.
It is no longer attractive because newer investments are being issued with higher
interest rates.
2. If you have a locked-in investment, you will have to wait until that investment matures
before you can reinvest at higher interest rates.
✔✔Credit Risk (Default Risk)
LLQP - SFA VL 21 - ✔✔Credit Risk (Default Risk) is the risk that the issuer will default
on promised payments.
The issuer of a bond could default on an interest payment or even on the principal
payment at maturity.
No matter how attractive the features of the bonds are, the bond is worthless of the
issuer is unable to unwilling to pay.
✔✔Inflation Risk (Purchasing Power Risk)
LLQP - SFA VL 21 - ✔✔Imagine an investor so afraid of risk, he was just going to put
his money under a pillow. Over time, his money would lose purchasing power.
Real return= Rate of Return - Inflation
= 10% - 2%
= 8%
,✔✔Liquidity Risk
LLQP - SFA VL 21 - ✔✔Liquidity Risk is the risk that an investment cannot be liquidated
or sold quickly without the loss of capital.
E.g. $10,000 Cash in an Bank Account.
This is a very liquid investment because it can
be accessed quickly with concern for the
market value.
E.g. Ownership of a Rental Property
An illiquid investment as it would take time for
it to sell.
✔✔Foreign Exchange Risk
LLQP - SFA VL 21 - ✔✔Foreign Exchange Risk is the risk of losses due to changes in
exchange rates.
E.g. if you invest $10,000 in U.S. stocks and those stocks perform well, you could still
lose money if the Canadian dollar changes relative to the U.S. dollar
✔✔Tiered Tax System
LLQP - SFA VL 22 - ✔✔
✔✔LLQP - SFA VL 22 - ✔✔Marginal Tax Rate: The tax rate you will pay on the next
dollar of income.
Effective Tax Rate: A combination of all your different tax rates. The weighted average
tax rate.
For example,
- $1,000 in bon interest
- Assume the interest is earned last (i.e. it's earned on top of all other income)
- Therefore, we would use the marginal Tax Rate when determining the amount of tax
✔✔RRSPs (Registered Retirement Savings Plan)
LLQP - SFA VL 23 - ✔✔1. RRSP contributions are deducted from incom, resulting in
immediate tax savings.
Example:
- 50% Marginal Tax Rate (MTR)
- $5,000 RRSP contribution
Tax savings =RRSP contribution x MRT= $5,000 x 50%=$2,500 saving
, 2. investment income within an RRSP is sheltered from taxation.
3. RRSP withdrawals are subject to taxation at the investor's full marginal tax rate.
- usually this happens in retirement, and because you are not working you are in much
lower tax bracket
✔✔In the year you turn 71 yearas old,
LLQP - SFA VL 23 - ✔✔1. Withdrawal the funds as a lump sum (NOT TAX EFFICIENT)
2. Transfer the funds to RRIF and withdrawal gradually. Youh must transfer RRSP
funds to a RRIF by December 31str of the year you turn 71.
✔✔What are two rules associated with RRIFs
LLQP - SFA VL 23 - ✔✔1. Once the RRIFs is established, minimum annual withdrawals
are required to allow CRA tro begin taking the registered savings. This minimum
amount ensures that money lasts throughout your retirement but is largely withdrawn by
the age 90.
2. Don't open a RRIF until you need the income. You can estable RRIF at any age but
usually it makes sense to wait because once you established, you are forced to take out
certain amount each year whether you need the income or not.
✔✔There are two categories of pension
LLQP - SFA VL 24 - ✔✔1. Defined Benefit Plan
2. Defined contribution Plan (MOney Purchase Plan)
✔✔Defined Benefit Plan
LLQP - SFA VL 24 - ✔✔What is known?
1. The end benefit (or the formula to determine the end benfit)
2. The employee's contribution.
What is unknown?
1. The employer's contribution.
i.e. the employer has guaranteed a future benefit
and will have to contribute whatever it takes to
make that benefit possible.
With this type of plan, the company may be called upon to contribute more because the
plan is udnerfunded.
✔✔Defined Contribution Plan
