HLLQP - SFA 01 FC - Investment and Savings

What is a "fund of funds"?

This is a type of fund that invests in other segregated funds. With a single fund purchase, the client can have exposure to many different funds

There are two main types of equities: common share and preferred shares. Which type of share carries less investment risk?

Preferred shares.

Preferred shareholders must receive their dividends before the dividends for common shares are paid; this means preferred shares are safer than common shares.

In the event of liquidation, preferred shareholders get their invested capital stock before any of the common shareholders do; this is another reason why preferred shares are safer than the common shares.g

What is an "insurance GIC (guaranteed investment certificate)" ?

An "accumulation annuity", which pays a fixed rate, also knows as an "insurance GIC". Since this form of GIC is issued by an insurance company, it offers other benefits associated with insurance products, including creditor protection and the ability to name a beneficiary and therefore bypass probate upon death. The CDIC insures Canadians' bank deposits up to $100,000 per personal account held in member Canadian banks to protect against losses in the event that the financial institution fails

Note: Accumulation annuities (also referred to as "insurance GICs") are not covered by The Canada Deposit Insurance Corporation (CDIC) but are potentially covered by Assuris.

What is a protection fund?

The overall success of Canada's financial services industry relies on investors having faith in the system. To help create a level of confidence in the system, various "protection funds" are available; the specific product depends on the type of institution with which the investor is dealing (e.g., securities firm, mutual fund issue, bank, insurer).

Examples of a protection fund would include Assuris (a product of the insurance industry) and Canada Deposit Insurance Corporation, also known as CDIC (banking industry)

All else being equal, if two bonds were issued today, which would offer higher coupon rate: the bond with the shorter term to maturity or the longer term to maturity?

Generally speaking, the longer the original term of a bond, the higher the coupon rate. This is because investors expect to be compensated for loaning their money to the issuer for a longer period of time.

This is no different from mortgage rates. Typically, the longer the mortgage term, the higher the interest rate.

Is a Canada Savings Bond considered a marketable bond?

No, A marketable bond can be traded in the marketplace much like a stock, and its market value fluctuate. However, this is not possible with Canada Savings Bonds and Canada premium Bonds, because CSBs ane CPBs cannot be bought and sold on the open market (i.e., they are not marketable).

What is another name for foreign exchange risk?

Currency Risk

Foreign exchange risk, or currency risk, is the risk of incurring losses as a result of unfavorable changes in exchange rates.

All else being equal, what type of investment income would generally incur the most tax?

Interest income.

Types of investment income from the least taxed to most heavily taxed:

- Capital gain (least taxed)

- Dividend income

- Interest income (most heavily taxed)

Memory aid: Notice they are in alphabetical order, from earliest to latest in the alphabet!

How would you define an equity investment?

In the simplest terms, "equity" can be defined as ownership. If you own common shares in a company, you own part, or a share, of that company.

For example, if you buy just one common share of Microsoft, you can truthfully tell your friends that you are a part-owner of Microsoft.

From what is the name "individual variable insurance contracts" derived?

This name is derived from the fact that the individual is purchasing an insurance contract that will have variable returns (i.e., the return will depend on the performance of the fund).

There are two main types of equities: common shares and preferred shares. which type would offer the higher potential reward?

Common shares

Common Shares

- Owners entitled to vote at shareholder

meetings.

- Unlimited potential for dividends and an

increase in share price.

Preferred Shares

- Usually pay a fixed annual dividend, but

nothing further.

- Are traded in the marketplace, but the

potential increase in share price is

limited because the most you will ever

receive from the investment is the fixed

dividend

What is an open-end mutual fund?

Most mutual funds are "open-end funds," which basically means that the fund is in a state of continuous distribution.

In other words on any valuation day- which may be defined differently from fund to fund, but which typically means each business day - an investor may purchase more units or choose to have his or her units redeemed.

https://www.investopedia.com/terms/o/open-endfund.asp

A recent innovation in mutual funds (as with other investments) is new disclosure rules. What are these new disclosure rules called?

Client Relationship Management 2 (CRM2):

CRM2 established new rules for greater disclosure to clients. Accordingly, mutual funds are now required.

There are two main types of equities: common shares and preferred shares. What are some characteristics of common shares?

- Owners entitled to vote at shareholder meetings

- Unlimited for dividends and an increase in share price.

All else being, how would the management fee on a segregated fund compare to that on a mutual fund?

It would be higher.

One of the main features of segregated funds is that they guarantee a portion of the investor's principal at death or upon the funds 10-year maturity. The guarantee is merely a safety net. These unique features do come at a cost, though; the management fee for a segregated fund is higher than it is for an equivalent mutual fund.

Does a no-load fund Charge a management fee?

Always,

Even if a fund is no load (no commission), a management fee is still charged to the assets of a fund. While a company may choose to waive commissions, no fund manager will work for free; therefore, a management fee is always charged.

What are some advantages of investing in stocks?

1. Stock price appreciation

The main advantage of owning common shares is the possibility of the share appreciating in price. This is not as much of an advantage on preferred shares, as discussed earlier.

2. Transparency when investing

All trades of publicly traded stocks can be seen by investors (i.e., the information is available on the exchange)

3. Dividends

Common and preferred shares both

have the potential to pay dividends.

4. Attendance at annual meetings

All shareholders can attend meetings. Only those with voting shares at allowed

to vote.

5. Favorable taxation

A stock portfolio can generate dividend and capital gain income, both of which receive favorable tax treatment compared to interest income.

What are some disadvantages of investing in stocks?

1. Risk of capital loss

The share price can decline

2. Potential lack diversification

An investor building his or her own stock portfolio may not have enough funds to properly diversify. A segregated fund may be a better option in such case.

3. Having to monitor investments

Stock prices change on a daily basis, and can fluctuate greatly. The portfolio should be monitored regularly to decide whether to buy, sell, or hold a given stock. A segregated fund may be a better option if this is a concern.

4. Commissions

Commissions usually apply to every date, whether the investor is buying or selling.

5. Liquidity issues

An investor may have to sell a stock

quickly for a multitude of reasons, but this could mean doing so the share price has fallen.

6. Lack special features of some insurance products such as stock ownership itself does not offer the ability to name a beneficiary, creditor- proofing, or other features

In simple terms, what is an annuity?

A Series of payments.

When an insurance company sells an annuity, a premium is collected from the client (usually as a lump sum). In exchange, the insurer agrees to pay an income to the client in a series of payments over a certain period of time. That time period could be fixed, such as 10 years, or the rest of the client's life, depending on the type of annuity that is purchased.

One of the main disclosure documents for a mutual fund is the Fund Facts document. Within what time frame must the purchaser of a mutual fund receive this document?

Before the purchase of the fund.

Note: The timeline is similar to an Information Folder (for a segregated fund) which much be given prior to purchase too.

There are two main types of equities: common shares and preferred shares. What are some characteristics of preferred shares

1. Usually pay a fixed annual dividend but nothing further.

2. Are traded in the marketplace, but the potential increase in share price is limited because the most you will ever receive from the investment is the fixed dividend. This is in contrast to a common share, for which the potential dividend and share price are unlimited.

3. Preferred shareholders must receive their dividends before the dividends for common shares are paid; this means preferred shares are safer than common shares.

4. In the event of liquidation (That is, the company closing up shop), preferred shareholders get their invested capital back before any of the common shares do; this is another reason why preferred shares are safer than common shares.

What would happen to the market value of a Canada Savings Bond if interest rates were to fall?

There would be no impact. A CSB cannot be traded, and therefore does not trade in the marketplace. For this reason it does not have a "market value."

Note: Canada Savings Bonds (CPBs) and Canada Premium Bonds (CPBs) were discontinued from sale as of November 1st, 2017.

Can a bank sell a life annuity?

No. Only life insurance companies can sell life annuities.

While life annuities can be sold only by insurance companies. Term annuities can be sold by various financial firms.

In relation to the sale, when must the client be provided with an information folder?

this must be provided to the client either before or at the time of sale.

Information folder: A disclosure document that provides information on the fund issuer, the fund itself, objectives of the fund, risks, fees, past performance, and other relevant information.

what are two main risks associated with an annuity investment?

1. interest rate risk

2. inflation risk

interest rate risk: the interest on an annuity investment is usually fixed. This would be not favorable for the investor if the interest rates were to rise, the investor would be unable to take advantage of higher rates.

inflation risk: Living on a fixed income means the annuitant is subject to inflation risk. As inflation increases (that is, as the cost of goods and services goes up), it becomes more and more difficult for someone earning a fixed income to make ends meet.

How is the net asset value per unit (NAVAPU) calculated?

NAVPU= (Fund Assets - Fund Liabilities)/ Number of Outstanding Units.

Example.: ABC Fund has $10,000,000 in assets, $1,000,000 in liabilities, and 500,000 outstanding units. The NAVPU would be calculated as follows:

NAVPU= ($10,000,000 - $ 1,000,000)/ 500,000 units = $9,000,000 / 500,000= $18

What is another name for a trailer fee?

A service fee

The advisor's work does not stop after the investor purchases units in a fund. Instead, the advisor will continue to monitor the client's portfolio. Service fees, also known as trailer fees, are deducted from the assets of the fund to pay for such services.

There are various protection funds. With which industry is each of the following protection funds associated?

Assuris:

CDIC:

CIPF:

Assuris: Insurance industry

CDIC: Deposit-taking institutions (banks trust companies)

CIPF: Securities Industry

How would the risk of a government bond compare to that of a corporate bond?

Government-issued bonds are generally safer than corporate bonds.

This is because a government can simply print more money and/or raise taxes to repay it's debts. However, this is not always possible as witnessed in Greece's financial instability in 2015.

What would be the risk/reward characteristics of a speculative investment?

The risk is high, but so is the potential reward.

For example, you are never going to get rich investing $10,000 in a bank account (which holds virtually no risk). However, you could get rich investing in the stock market - but there's a chance you could lose money as well.

https://www.youtube.com/watch?v=blnbxbftme0

What are some advantages of in bonds?

1. There is a wide range of bond issuers (governments and corporations), both domestic and foreign. This provides opportunities to diversify a bond portfolio.

2. Bonds can be purchased in varying terms, from short-term to very long-term (up to 30 years).

3. The repayment principal and interest on government bonds is virtually guaranteed. it is highly unlikely that a government will default, although that risk does exist for some countries.

4. Barring default, the investor will receive regular interest payments and the principal back at maturity.

Are insurance GICs covered by Canadian Deposit Insurance Corporation (CDIC)?

Accumulation annuities (also referred to as "insurance GICs") are not covered by CDIC but are potentially covered by Assuris.

An "accumulation annuity", which pays a fixed rate, is also known as an "insurance GiC". Since this form of GIC is issued by an insurance company, it offers other benefits associated with insurance products, including creditor protection and the ability to name a beneficiary and therefore bypass probate upon death.

There are many different ways segregated funds can be grouped? What are the ways that segregated funds can be grouped?

1. By asset class (e.g., equity fund, bond fund, mortgage fund)

2. By subsets of asset class (e.g., financial services stocks, energy stocks)

3. By combinations of asset classes (e.g., balanced funds, which invest in all three asset classes)

4. Geographically (e.g., Canadian equity fund, Euro equity fund)

There are many different types of GICs available in the marketplace. What is an escalating GIC?

The interest rate increases each year. Some escalating GIC's even allow the investor to redeem all or a portion of the deposit on each anniversary, with the remaining amount invested earning a higher interest rate.

Note: The other types are summarized below.

Fixed rate: The interest rate is stated in advance and remains fixed.

Cashable: Redeemable at any time. The downside is that the interest rate on this type of GIC will be lower than one that is locked in.

Variable interest rate: The interest rate is tied to some sort of benchmark, such as the Consumer Price Index (CPI), which is a measure of inflation. If the benchmark interest rate fluctuates, then so does the rate on the GIC.

Market-linked: The interest rate is linked to the performance of a particular equity index, such as the S&P/ TSX composite index. The principal on the GIC is guaranteed, but the interest rate is usually capped. For example, the interest could be 75% of the market index return with a cap on the annual interest rate of 10%

Financial education: GIC Explained... - FinanciaStop

https://www.youtube.com/watch?v=xW47qW7jKmY

One of the categories of investments is real estate. Would your principal residence fall under this category of investment?

No. Real estate as an investment does not refer to the purchase of one's own home, but rather investment in real estate such as residential rental properties or commercial units.

What is interest rate risk?

If an investor buys an investment which has a locked-in- interest rate, the investor will not be able to take advantage of higher rates until after the investment matures.

Interest rates can affect the market value of a fixed interest rate investment. For example, if interest rates increase, the market value of an existing bond with a lower coupon rate will likely decline. This was discussed in the introduction.

What is a closed-end mutual fund?

Closed-end funds: A "closed-end fund" is one in which only a certain number of units are issued, and then no more.

From a tax perspective, capital losses can be used to offset capital gains. What options would an investor have if he or she is unable to use a capital loss in a given tax year?

Capital losses claimed in the current tax year can be carried back three tax years, or be carried forward indefinitely.

What is currency risk?

Foreign exchange risk, or currency risk, is the risk of incurring losses as a result of unfavorable changes in exchange rates.

For example, Jay has invested $1,000 in US stocks. One day later, his stocks are still worth $1,000 US, but the US dollar has fallen in relationship to the Canadian dollar. If he were to sell his shares today and convert the money to Canadian dollars, he would lose money.

What is compound interest?

Where simple interest means that interest is paid on the original principal amount only, compound interest involves earning interest upon interest.

All else being equal, how would it affect the market value of a bond that trades in the open market if interest rates were to fall?

It would likely increase the market value of the bond.

Interest rates and market value of existing bonds usually move in opposite directions.

Can a segregated fund investor redeem his or her investment prior to the maturity date?

Yes

The term "maturity guarantee" can be misleading. It does not imply that a segregated fund is locked in for the full 10 years. The contract holder can redeem his or her investment at any time; however, the guarantee return will apply only upon death or after the fund has been held for 10 years *whichever comes first)

In simple terms, what is investing?

Investing is really just using money to make more money.

The principle of investing can be summed up by the old saying, "It takes money to make money." For example, an investor could buy shares in a large corporation or a business owner could lease a larger storefront location in the hopes of increasing profits.

Fill in the blank with "greater than" or "less than"

The NAV of a given fund would be ______its NAVPU

The NAV of a given fund would be greater than its NAVPU.

Net asset value(NAV) = (Asset - Liabilities)

Net asset value (NAVPU) = (Asset - Liabilities)/# of outstanding units

What types of bonds are not transferable, and therefore do not trade in the open market?

Canada Saving Bonds (CSB) and Canadian Premium Bonds (CPB)

Exam tip: on the exam, you may assume that a question simply referring to a "bond" does not concern a CSB or CPB, but rather one that can trade on the open market.

Note: Canada Savings Bonds (CPBs) and Canada Premium Bonds (CPBs) were discontinued from sale as of November 1st, 2017

Where did the name "segregated fund" come from?

This type of fund is so named because the insurer is required to keep the fund's assets completely separate (that is, segregated) from the company's other assets.

What types of losses would a protection fund cover?

Protection funds are generally intended to protect an investor in the event that a financial institution with which they have invested becomes insolvent.

To clarify, protection funds do not protect against poor investment decisions - only against the bankruptcy of the company that holds the investments. The following examples shows a loss that would not be covered by any fund.

Example: An investor bought common shares in a major bank. That bank filed for bankruptcy the following year, causing the share price to fall zero. A protection fund would not cover this loss, because it was just a poor or unfortunate investment decision.

How would you differentiate the time frames for short-term, medium-term, and long-term investments?

Short term: Three years or less

Medium term: More than three years, but less than ten.

Long term: Ten years or more

Segregated funds offer certain guarantees. Why wouldn't everyone select an investment that offers guarantees?

Risk and reward are interrelated. In general, the more risk you assume, the greater the potential reward - but also the greater the potential loss.

For example, you are never going to get rich investing $10,000 in a bank account (which holds virtually no risk). However, you could get rich investing in the stock market - but there's a chance you could lose money, as well.

What is CIPF?

The Canadian Investor Protection Fund (CIPF) protects investors up to a certain limits if a member institution becomes insolvent, resulting in a loss for the investor. The CIPF protects a wide range of products purchased through member dealers, including stocks, bonds, and mutual funds. The maximum coverage amount is $1,000,000 (general account). Remember, it does not cover investment losses.

Members of the CIPF include the following:

- Members of the Investment Industry Regulatory Organization of Canada (IIROC)

- Members of the Bourse de Montreal (stock exchange)

- Members of the Toronto Stock Exchange

Can a bank sell a life annuity?

No. Only life insurance companies can sell life annuities.

While life annuities can be sold only by insurance companies, term annuities can be sold by various financial terms.

What are some of the advantages that a group plan offers an employer (plan sponsor)?

1. Offering these benefits can help the employer attract and retain good staff.

2. The plan can be tailored to the employer's needs and wants.

3. The employer is the plan holder, and can therefore amend the plan if required.

4. Employer contributions, much like an employee salaries, are usually tax-deductible as a business expense.

Is an RRSP an investment?

Np, it is just an account! To use an analogy, a registered account is similar to toolbox. A toolbox is not a tool; Instead, it is something that you use to hold your tools. Likewise, an investment account of any kind is simply an account in which investments are held.

For this reason, you do not need a license to sell an RRSP. However, you may need a license to sell some of the products the client wants to hold within his or her RRSP. For example, if the client wanted to buy segregated funds, you would require a life insurance license.

Which type of financial investment would be most similar to a life insurance policy: a segregated fund, or a mutual fund?

A segregated fund.

A segregated fund is basically the insurance industry's version of a mutual fund. However, segregated funds offer some unique advantages that mutual funds typically do not. For example, segregated funds offer certain guarantees upon death or at the 10-year maturity mark, along with the ability to bypass probate and the opportunity for creditor-proofing.

What is liquidity risk?

The risk that an investment cannot be liquidated (sold and converted to cash) quickly, without the loss of capital.

On one extreme, $10,000 in cash sitting in a bank account is a very liquid investment. On the other hand, ownership of a rental property is not considered liquid.

What is CDIC?

The CDIC insures up to $100,000 in Canadian-dollar (CAD) deposits held at CDIC member institutions (banks trust companies, and so on) with terms of five years or less.

What is the biggest risk of a bond investor faces?

Credit or default risk.

If a bond issuer permanently defaults, the investor would lose all of their money. You can't face much more risk than that!

What special features does a segregated fund offer that a mutual fund would not?

1. Maturity and death benefit guarantees

2. The ability to bypass probate

3. The potential for creditor-proofing

Note: These unique features do come at a cost, though. The management fee for a segregated fund will be higher than it is for an equivalent mutual fund.

How would you define an equity investment?

In the simplest terms, "equity" can be defined as ownership. If you own common shares in a company, you own part, or share, of that company.

For example, if you buy just one common share of Microsoft you can truthfully tell your friends that you are a part-owner of Microsoft.

What is inflation risk?

Inflation can erode the real return on an investment. If inflation exceeds the rate of return, the investor is actually losing purchasing power.

Real Return= Nominal Return - Inflation

What are some of the disadvantages that the plan sponsor(employer) of a group plan faces?

- Group RRSP contributions are subject to payroll tax.

- Once established, some plans place financial constraints on an employer, such as the requirement to fund an established defined-benefit pension plan.

All else being equal, a Canada Premium Bond (CPB) would pay a higher interest rate than a Canadan Savings Bond (CSB). Why is that?

A CPB is less liquid than a regular CSB and will offer a slightly higher interest rate as a result, hence the word "premium."

A CPB is a special type of CSB that is redeemable only once per year (without having to give up interest). In other words, if the bond is redeemed in the middle of the year, interest is payable only up until prior anniversary date of the bond.

What is a load fee?

a load fee is really just a commission.

No load: No commission is charged

Front-end load: A commission is charged upon purchase.

Back-end or deferred sales charge (DSC): A commission is charged upon redemption. This type of load will gradually decrease and eventually become zero. This is to encourage long-term investment in the fund.

What is meant by the term diversification?

Diversification involves spreading risk over several investments.

The goal is to lower risk while achieving higher overall returns. Diversification can be achieved simply by having more than one investment, but a portfolio can also be diversified by asset class, different geographical locations, different industries maturity date of investments, and other factors.

What would happen to the market value of a Canada Savings Bond if interest were to fall?

There would be no impact. A CSB cannot be traded, and therefore does not trade in the marketplace. For this reason it does not have a "market value"

Corporate and government bonds can trade in the open market. What two main forces can affect a bond's market value?

1. The creditworthiness of the Issuer: The market value of a bond would surely decline if there was doubt as to whether the issuer could make the required interest and principal repayments.

2. Changes in interest rates: Rising interest rates would put downward pressure on the market value of existing bonds

What is the only type of pension plan that guarantees a specific pension income (as expressed either by a dollar amount or a formula) after retirement?

A defined-benefit pension plan

What types of financial institutions can sell life annuities?

Only life insurance companies can sell life annuities.

While life annuities can be sold only by insurance companies, term annuities can be sold by various financial terms.

Segregated funds guarantee a certain percentage of the original investment upon death or upon the 10-year maturity date. What is the minimum percentage guarantee as segregated fund can offer?

A segregated fund is guaranteed to pay out at least 75% of the original investment.

What is GIC?

A guaranteed investment certificate (GIC), which is classified as a term deposit, is an investment in which the investor locks in money for a certain period of time in exchange for a fixed interest rate.

A GIC investment can be made with as little as $500, and can be purchased at most financial institutions (banks, trust companies, insurance companies, and others).

How would you calculate the real return on an investment?

Real Return = Nominal Return- Inflation (increased prices)

Assume that you earned a 5% return on your investment portfolio, but during that same time, the average cost of goods and services in Canada also increased by 5% (these prices increases are referred to as inflation). Within this in mind, are you any further ahead? The answer is, or course, "No." Sure, you have 5% more money, but everything you want or need to buy costs 5%. In this scenario, your your nominal return is 5% but your real return is 0%

What is meant by an investment's time horizon?

Time horizon refers to how long a saving/investment period will be.

For example, if an individual is saving for the purchase of a car in six months, her time horizon is six months. If an individual is saving for retirement, her time horizon could be two or three decades.

An ETF (exchange-traded fund) is considered a passive investment. Why is that the case?

An ETF will mimic an entire index (e.g., the Toronto Stock Exchange index) or a subset of an index (e.g., the S&P/TSX 60) as opposed to trying to outperform the market, which would require active management.

What is the "inception date" of a segregated fund?

The inception date is the date on which the fund began to operate

Investments can be categorized into three main/primary categories and two secondary categories. What are they?

Main/Primary

1. Money market

2. Fixed income

3. Equity

Secondary

1. Real estate

2. Commodities