IFIC Chapter 13 questions with complete
solutions
Alternative Managed Products - correct answer ✔✔-professionally managed portfolios of basic asset
classes and/or commodities and include segregated funds, hedge funds, alternative mutual funds,
exchange-traded funds, closed-end funds and principal-protected notes (PPN)
What Distinguishes Alternative Managed Products - correct answer ✔✔-use of complex investment
strategies, such as the use of derivatives, leveraging and principal guarantees, skewing risk/return
profiles
Principal-Protected Note (PPN) - correct answer ✔✔-a debt instrument. Like other debt instruments, a
PPN has a maturity date upon which the issuer agrees to repay investors their principal. In addition to
the principal, PPNs provide interest paid either at maturity or as regular payments linked to the positive
performance of the underlying PPN asset.
-the underlying assets can be common stocks, indexes, mutual funds, exchange-traded funds,
commodities or hedge funds
-issued only by the 6 major banks
-these products are not mutual funds; as a result, they are not held to the transparency standards of
mutual funds
-the PPN doesn't have a guaranteed return, while a simple GIC does.
Banks 3 Main Roles In PPNs - correct answer ✔✔-issuers- the banks guarantee the return of principal at
maturity. The value of the guarantee is based wholly on the perceived creditworthiness of the issuer.
-manufacturers- they choose the underlying asset, the term to maturity, and any special features tied to
interest payments.
-distribute- primarily through their investment dealer arm, although some banks use a third-party
investment dealer or mutual fund dealer
Explicit Costs Of Principal-Protected Notes - correct answer ✔✔-commissions
-managements fees
-early redemption fees
, -structuring costs and guaranteed fees
PPN Risks - correct answer ✔✔-lack of transparency
-lack of knowledge regarding suitability
-not protected by CIDC
-not issued under a prospectus
-risks also include market, liquidity, credit and, currency
PPN Commissions - correct answer ✔✔-PPNs differ from mutual funds in that investors bear the cost of
the commission at the time of purchase because the net asset value (NAV) of the PPN declines directly as
a result of commissions paid.
PPN Management Fees - correct answer ✔✔-many PPNs carry a management fee for actively managing
the PPN's assets. Some PPNs, however, are issued without management fees. When a management fee
is charged it is charged to the assets of the PPN. Management fees affect the PPN's performance, which
in turn affects the final payoff received by investors.
PPN Early Redemption Fees - correct answer ✔✔-many PPNs carry an early redemption fee or deferred
sales charge. A typical early redemption fee schedule runs from two to five years and declines over time,
as with a mutual fund. The purpose of the early redemption fee is to ensure that the PPN's issuer
receives the full fees it was expecting.
PPN Structuring Costs and Guarantee Fees - correct answer ✔✔-some PPNs include an explicit charge for
structuring, and most PPNs charge a fee for providing the capital guarantee
Implicit Costs - correct answer ✔✔-fees borne by investors that may or may not be immediately visible
and that may or may not be openly disclosed in the documents
Implicit Costs Of Principal-Protected Notes - correct answer ✔✔-performance averaging formulas
-performance participation caps
-price returns vs. total returns
solutions
Alternative Managed Products - correct answer ✔✔-professionally managed portfolios of basic asset
classes and/or commodities and include segregated funds, hedge funds, alternative mutual funds,
exchange-traded funds, closed-end funds and principal-protected notes (PPN)
What Distinguishes Alternative Managed Products - correct answer ✔✔-use of complex investment
strategies, such as the use of derivatives, leveraging and principal guarantees, skewing risk/return
profiles
Principal-Protected Note (PPN) - correct answer ✔✔-a debt instrument. Like other debt instruments, a
PPN has a maturity date upon which the issuer agrees to repay investors their principal. In addition to
the principal, PPNs provide interest paid either at maturity or as regular payments linked to the positive
performance of the underlying PPN asset.
-the underlying assets can be common stocks, indexes, mutual funds, exchange-traded funds,
commodities or hedge funds
-issued only by the 6 major banks
-these products are not mutual funds; as a result, they are not held to the transparency standards of
mutual funds
-the PPN doesn't have a guaranteed return, while a simple GIC does.
Banks 3 Main Roles In PPNs - correct answer ✔✔-issuers- the banks guarantee the return of principal at
maturity. The value of the guarantee is based wholly on the perceived creditworthiness of the issuer.
-manufacturers- they choose the underlying asset, the term to maturity, and any special features tied to
interest payments.
-distribute- primarily through their investment dealer arm, although some banks use a third-party
investment dealer or mutual fund dealer
Explicit Costs Of Principal-Protected Notes - correct answer ✔✔-commissions
-managements fees
-early redemption fees
, -structuring costs and guaranteed fees
PPN Risks - correct answer ✔✔-lack of transparency
-lack of knowledge regarding suitability
-not protected by CIDC
-not issued under a prospectus
-risks also include market, liquidity, credit and, currency
PPN Commissions - correct answer ✔✔-PPNs differ from mutual funds in that investors bear the cost of
the commission at the time of purchase because the net asset value (NAV) of the PPN declines directly as
a result of commissions paid.
PPN Management Fees - correct answer ✔✔-many PPNs carry a management fee for actively managing
the PPN's assets. Some PPNs, however, are issued without management fees. When a management fee
is charged it is charged to the assets of the PPN. Management fees affect the PPN's performance, which
in turn affects the final payoff received by investors.
PPN Early Redemption Fees - correct answer ✔✔-many PPNs carry an early redemption fee or deferred
sales charge. A typical early redemption fee schedule runs from two to five years and declines over time,
as with a mutual fund. The purpose of the early redemption fee is to ensure that the PPN's issuer
receives the full fees it was expecting.
PPN Structuring Costs and Guarantee Fees - correct answer ✔✔-some PPNs include an explicit charge for
structuring, and most PPNs charge a fee for providing the capital guarantee
Implicit Costs - correct answer ✔✔-fees borne by investors that may or may not be immediately visible
and that may or may not be openly disclosed in the documents
Implicit Costs Of Principal-Protected Notes - correct answer ✔✔-performance averaging formulas
-performance participation caps
-price returns vs. total returns
