Canadian Investment Funds Course Unit 5: Types of Investments
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Questions and Answers

What is the main purpose of a Dealing Representative having in-depth knowledge about different types of investments?

  • To impress clients with complex investment jargon
  • To confuse clients with investment options
  • To showcase expertise in financial markets
  • To effectively match clients with suitable investments (correct)

    • Which type of investments are covered in the 'Types of Investments' unit as mentioned?

  • Cryptocurrencies and collectibles
  • Real estate and commodities
  • Art and antiques
  • Fixed income and money market instruments (correct)

    • What is the approximate duration of Unit 5: Types of Investments as mentioned?

  • 2 hours and 10 minutes (correct)
  • 3 hours
  • 45 minutes
  • 1 hour and 30 minutes

    • What is the main focus of Lesson 1: Building Blocks of Mutual Funds?

    <p>Learning about mutual fund structures</p> Signup and view all the answers

    What does a mutual fund typically consist of?

    <p>A mix of different types of investments</p> Signup and view all the answers

    Why is it important for Dealing Representatives to know about the investment objectives of mutual funds?

    <p>To match clients with suitable investments</p> Signup and view all the answers

    What is the key role of a Dealing Representative when it comes to mutual funds?

    <p>Educating clients about mutual funds</p> Signup and view all the answers

    'Equities' mentioned in the unit most likely refer to what type of asset?

    <p>Stocks or shares in companies</p> Signup and view all the answers

    What is the main investment profile of zero-coupon bonds?

    <p>Income and stability of principal</p> Signup and view all the answers

    Why are zero-coupon bonds typically held in registered accounts like RRSPs?

    <p>To shelter interest income from taxes</p> Signup and view all the answers

    What happens to the accrued interest income of strip bonds held in a nonregistered account?

    <p>Investors pay taxes on it annually</p> Signup and view all the answers

    How do zero-coupon bonds differ from strip bonds in terms of tax implication?

    <p>Zero-coupon bonds accrue interest annually for tax purposes</p> Signup and view all the answers

    Where does the interest income generated by securities like strip bonds go if held in a registered account?

    <p>It is sheltered from taxes</p> Signup and view all the answers

    What is the primary characteristic of zero-coupon bonds' face value at maturity?

    <p>It is pre-determined</p> Signup and view all the answers

    How do investors benefit by holding strip bonds in a registered account?

    <p>They are not taxed on accrued interest income</p> Signup and view all the answers

    What is the tax implication for investors holding strip bonds in a nonregistered account?

    <p>They pay annual taxes on accrued but unpaid interest income</p> Signup and view all the answers

    What is the purpose of investing in coupon bonds?

    <p>To maintain a stable income with higher returns than money market securities</p> Signup and view all the answers

    In the context of coupon bonds, what happens if the issuer defaults on payments?

    <p>The bondholder initiates bankruptcy proceedings against the issuer</p> Signup and view all the answers

    How are coupon payments for coupon bonds calculated?

    <p>Coupon Payment = [(face value x coupon rate) ÷ number of payments per year]</p> Signup and view all the answers

    What is Karen's semi-annual coupon payment on her $10,000 ABC bond with a 6% coupon rate?

    <p>$300</p> Signup and view all the answers

    What type of payment does Karen receive on February 1, Year 4, in relation to her ABC bond investment?

    <p>Interest payment</p> Signup and view all the answers

    Why do bondholders of coupon bonds no longer receive physical certificates?

    <p>To reduce the risk of losing certificates</p> Signup and view all the answers

    What investment objective do coupon bonds primarily aim to achieve?

    <p>Stability of income with relatively higher returns than money market securities</p> Signup and view all the answers

    If a bondholder wants to force the issuer into bankruptcy due to defaults, what can they use the proceeds from selling assets for?

    <p>To repay both principal and interest payments</p> Signup and view all the answers

    What is the annual coupon payment on a bond with a par value of $800 and a coupon rate of 6%?

    <p>$40</p> Signup and view all the answers

    If a bond's market price rises above its par value, what can be said about its current yield?

    <p>It will be less than the coupon rate</p> Signup and view all the answers

    What is the current yield on a bond sold at a premium of $1,500 with an annual coupon payment of $75?

    <p>4.5%</p> Signup and view all the answers

    If interest rates increase, what happens to the market price of a bond trading at a premium?

    <p>It decreases</p> Signup and view all the answers

    How does the current yield of a bond relate to its yield-to-maturity when it's trading at a discount?

    <p>Current yield is greater than yield-to-maturity</p> Signup and view all the answers

    What is the relationship between bond prices and interest rates when the bond is trading at par?

    <p>Current Yield equal to Coupon Rate</p> Signup and view all the answers

    In which scenario would a bond be considered to be trading at a discount?

    <p>$1,000 bond selling for $950</p> Signup and view all the answers

    What are the key differences between forward contracts and futures contracts?

    <p>Futures contracts are customized contracts, while forward contracts are standardized.</p> Signup and view all the answers

    If Jerome enters into a forward contract to lock in the Canadian-Euro exchange rate, what does this ensure?

    <p>That Jerome will pay the exchange rate at the three specified points in time.</p> Signup and view all the answers

    How do forward and futures contracts differ in terms of trading venue?

    <p>Forward contracts are traded through a broker-dealer, while futures contracts are not.</p> Signup and view all the answers

    What role does a clearinghouse play in futures contracts?

    <p>The clearinghouse ensures that buyers and sellers follow through on the contract.</p> Signup and view all the answers

    In what way do derivatives like options, forward, and futures contracts contribute to mutual fund management?

    <p>Derivatives help to reduce risk and maximize profits in mutual funds.</p> Signup and view all the answers

    Which currency are Canadian mutual funds mostly denominated in?

    <p>Canadian Dollars</p> Signup and view all the answers

    Why might it be risky for buyers and sellers in forward contracts if there is no clearinghouse involved?

    <p>Buyers and sellers have no protection against defaulting on their contractual obligations.</p> Signup and view all the answers

    How does entering into a forward contract impact Jerome's certainty about future payment obligations?

    <p>'Jerome will have to pay in the future' is certain with a forward contract.</p> Signup and view all the answers

    What is the primary focus of portfolio managers who use the bottom-up approach?

    <p>Individual companies</p> Signup and view all the answers

    What is the main criterion Jenny uses to identify investment prospects for the European Value Fund?

    <p>Companies' good prospects</p> Signup and view all the answers

    Why does Jenny decide to invest in Kredietbank and Peroni Company despite the economic conditions of Belgium and Italy?

    <p>Solid management and good company prospects</p> Signup and view all the answers

    Which aspect of companies does Jenny focus on during her investment process for the European Value Fund?

    <p>Business prospects</p> Signup and view all the answers

    What do portfolio managers using the bottom-up approach believe can lead to success for good companies?

    <p>Solid management and business prospects</p> Signup and view all the answers

    How do portfolio managers using the bottom-up approach view the importance of market cycles?

    <p>Secondary consideration</p> Signup and view all the answers

    Which investment style looks for securities of companies with above-average growth potential compared to their peers?

    <p><strong>Growth</strong></p> Signup and view all the answers

    Bottom-Up Portfolio managers primarily focus on which level of analysis?

    <p><strong>Individual companies</strong></p> Signup and view all the answers

    What prevents Susan's portfolio manager from making defensive moves to protect investors in her index fund?

    <p>Being passively managed</p> Signup and view all the answers

    Why do practitioners of active portfolio management believe in their ability to outperform benchmarks?

    <p>Market inefficiencies</p> Signup and view all the answers

    What is the key difference between passive and active portfolio management?

    <p>Portfolio managers' ability to pick securities</p> Signup and view all the answers

    Why are passive investment strategies often criticized in terms of downside protection?

    <p>Inability to make defensive moves</p> Signup and view all the answers

    What is the core belief that drives active portfolio managers to seek outperforming benchmarks?

    <p>Market inefficiencies in security pricing</p> Signup and view all the answers

    What concept forms the basis of active portfolio management that passive strategies lack?

    <p>Market inefficiencies in pricing</p> Signup and view all the answers

    Why might Susan's index fund experience exaggerated ups and downs compared to the benchmark?

    <p>-10.7% mutual fund return in a falling market</p> Signup and view all the answers

    What kind of information do financial ratios provide about a company's future prices?

    <p>General trends</p> Signup and view all the answers

    Which aspect of financial ratios allows portfolio managers to compare companies of different sizes?

    <p>Relative numbers</p> Signup and view all the answers

    What is the primary focus of liquidity ratios in financial analysis?

    <p>Ability to meet short-term obligations</p> Signup and view all the answers

    Which statement best describes the purpose of profitability ratios?

    <p>Evaluating revenue-generating capabilities</p> Signup and view all the answers

    How are financial ratios used by portfolio managers to identify trends and opportunities?

    <p>By analyzing data over time</p> Signup and view all the answers

    In financial analysis, what do debt-equity ratios primarily indicate about a company?

    <p>Financing structure</p> Signup and view all the answers

    Why are portfolios that are below the efficient frontier considered inefficient and inferior?

    <p>They offer lower returns for the same level of risk.</p> Signup and view all the answers

    Which type of financial statement is used by portfolio managers to analyze securities and provides information about the company's assets, liabilities, and equity at a specific point in time?

    <p>Balance Sheet</p> Signup and view all the answers

    What do portfolio managers assess when using liquidity ratios in evaluating securities?

    <p>Ability to meet short-term obligations</p> Signup and view all the answers

    Which type of ratio helps portfolio managers assess how much of a company's operations are financed by debt versus equity?

    <p>Debt-equity ratio</p> Signup and view all the answers

    What is the primary focus of financial analysis for portfolio managers?

    <p>Assessing past and current company performance</p> Signup and view all the answers

    What is required of companies that make their securities available to the public?

    <p>Annual publication of audited financial statements</p> Signup and view all the answers

    What impact does a strong Canadian dollar relative to the U.S. dollar have on the return of U.S. investments held by Canadian investors?

    <p>The return is reduced after assets are converted into Canadian dollars</p> Signup and view all the answers

    How does volatility affect the actual performance of a mutual fund?

    <p>High volatility leads to dramatic price fluctuations, affecting actual performance</p> Signup and view all the answers

    In assessing the total return of a fund, why is it important to know the types of risks to which securities are exposed?

    <p>To understand the impact of volatility on security values</p> Signup and view all the answers

    How do investments with lower volatility levels differ in terms of price changes over time compared to highly volatile securities?

    <p>Experience steady price change over time</p> Signup and view all the answers

    When looking at measures of investment risks, what is referred to as a measure of changes in a security's value over time?

    <p>Volatility</p> Signup and view all the answers

    How do highly volatile securities differ from investments with lower volatility levels in relation to expected performance?

    <p>Low volatility investments are more likely to meet expected performance</p> Signup and view all the answers

    What does the term 'volatility' primarily measure in relation to securities?

    <p>Changes in value over a period of time</p> Signup and view all the answers

    How do securities with higher volatility levels typically behave compared to those with lower volatility levels?

    <p>'More-risky' but 'lower-liquidity'</p> Signup and view all the answers

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