117 Questions
What is one reason why someone might need to choose a longer amortization period?
To have lower monthly payments
What is the longest amortization period allowed on Canadian mortgages?
25 years
What advantage does a mortgage broker have over a bank in arranging mortgages for home buyers?
Negotiating lower mortgage rates than banks
What does an open mortgage allow the borrower to do?
Pay off the mortgage without penalty
When might an open mortgage be useful to a home buyer?
When planning to pay off the mortgage early without penalty
Why might a bank be unable to fully match the rate that a mortgage broker can obtain for a home buyer?
Banks prioritize preferred customers over others
What is one way an investor can mitigate risk while still benefiting from the higher yields of junk bonds?
Investing in a fund holding a diversified portfolio of junk bonds
What distinguishes Real Return Bonds (RRBs) from regular bonds?
They provide protection against inflation by adjusting interest rates
When are Real Return Bonds (RRBs) considered advantageous investments?
When the official rate of inflation is high
What is the primary reason investors consider Real Return Bonds (RRBs) as useful investments?
To protect against long-term risks of inflation
How do Real Return Bonds (RRBs) perform compared to regular bonds in high inflation scenarios?
RRBs outperform regular bonds due to pegged interest rates
What is the maturity period typically associated with Real Return Bonds (RRBs)?
15-20 years
What is one of the benefits of using a TFSA as an emergency fund?
Access funds quickly without penalties
What is one advantage of an RRSP contribution regarding maintaining financial flexibility?
Withdrawn funds can be replaced in future years
How does the text differentiate between saving money and investing?
The level of risk involved
What is compounding in the context of investing?
The process of reinvesting earnings to generate more earnings
What is one way to utilize a tax refund from making RRSP contributions?
Paying down mortgage principal
In what way can a TFSA be utilized for financial goals other than retirement?
Accumulating funds for a home down payment
What is the maximum combined OAS and GIS payment that an individual can receive per month?
$1,443
Which type of pension plan provides a retired employee with a predetermined monthly benefit based on earnings history, years of service, and age?
Defined Benefit Plan
What percentage of public-sector employees belong to a Defined Benefit Pension Plan according to the text?
80%
What is the main factor that determines the eventual pension benefit in a Defined Contribution Pension Plan?
Investment earnings
What does it mean for an employee's pension plan to be vested?
The employee has full ownership of all funds in the plan
What happens if an employee's employment is terminated before achieving vested status in the pension plan?
The funds are forfeited
Why is travel medical insurance necessary when leaving Canada?
To avoid skyrocketing medical costs in case of sudden medical care needs
Why is home insurance considered a mandatory expense for prudent homeowners?
To help cover additional living expenses if temporarily unable to live in the home
What makes travel insurance a valuable protection for travelers?
It provides financial coverage for various risks associated with traveling
In what scenario would not having travel medical insurance be most detrimental?
When requiring immediate medical attention while abroad
Why should travelers consider insuring themselves and their families before leaving Canada?
To avoid unexpected expenses related to emergency medical care outside Canada
What motivates homeowners to accept home insurance as a mandatory expense?
To protect their most valuable asset and belongings in case of unforeseen events
What must happen to an RRSP by the end of the year the holder turns 71?
It must be converted to a Registered Retirement Income Fund (RRIF)
What percentage of the RRIF balance must be withdrawn in the first year upon starting withdrawals?
5.4%
What happens to the remaining balance in an RRSP or RRIF when the owner passes away?
It passes tax-free to a designated spouse
What does the term 'marginal tax bracket' refer to?
The tax rate applied to the next dollar of income earned
At what age does the percentage of RRIF withdrawals peak at 20%, as per the text?
95
What type of investments should a prudent investor consider including in their portfolio, especially as they approach retirement?
Fixed-income securities
What defines financial independence?
Being able to maintain a desired lifestyle without employment income
In the context of investments, what is the primary purpose of a bond?
To provide periodic interest payments and return the principal
When an individual buys a bond, what role do they take on in relation to the issuer?
Creditor
What distinguishes Real Return Bonds (RRBs) from regular bonds?
Offer protection against inflation
How does the text describe the relationship between interest rates and returns on fixed-income securities?
Returns become unattractive when rates are low
What is the main benefit of contributing to an RRSP in terms of tax treatment?
Contributions are tax-deductible in the year they are made.
How are withdrawals from an RRSP typically treated for tax purposes?
Withdrawals are subject to full taxation as regular income.
What happens to the earnings on funds held within an RRSP in terms of tax treatment?
Earnings are fully tax-exempt until they are withdrawn.
For how long can earnings on funds held within an RRSP remain tax-exempt?
Until the funds are withdrawn
What percentage of earned income can be contributed to an RRSP in any calendar year?
18%
How does having an RRSP help individuals maintain financial flexibility?
By offering a balance between savings and tax advantages
What is the minimum percentage of a RRIF's total value that must be withdrawn beginning the year after an RRSP holder turns 71?
5.4%
Which of the following is NOT an item to consider when making individual retirement plans based on the text?
Presence of a car loan
At what age does the minimum withdrawal from an RRIF reach 20% according to the text?
95
Which contribution ceases upon retirement based on the text?
Union dues
Seniors qualify for a tax credit of up to $2,000 annually if they:
Receive pension or RRIF income
How are Index Funds typically managed and available for purchase?
Managed by fund managers and available directly through banks
What distinguishes Exchange Traded Funds (ETFs) from Index Funds in terms of trading?
ETFs can be bought and sold like stocks on stock exchanges, while Index Funds are managed by banks
What is a common way to purchase Guaranteed Investment Certificates (GICs) and Treasury Bills (T-Bills)?
Directly at most major financial institutions
How long must investment values rise in order for it to be considered a Bull Market?
At least three months
In a Bear Market, what typically happens to investment values?
They decrease by more than 20%
What is the defining feature of a Market Correction?
A temporary reverse movement of at least 10%
What led to major banks worldwide being threatened with collapse according to the text?
Falling house prices and delinquencies in mortgage payments
In the context of the U.S. economic crisis of 2008/2009, what happened as house prices began to soften in 2006?
Delinquencies in mortgage payments soared
What event led to major write-downs of capital assets by many banks and financial institutions globally?
Falling house prices and delinquencies in mortgage payments
Why were many U.S. mortgages issued to homeowners with a restricted ability to repay their loans?
Due to low interest rates at the time
What was created in a semi-coordinated, world-wide effort to prevent the global recession from deteriorating into a full-blown depression?
Government bailouts
What caused delinquencies to soar and foreclosures to follow during the U.S. economic crisis of 2008/2009?
Falling house prices
What is a potential disadvantage of choosing a longer amortization period for a mortgage?
Increased total interest paid
What is the primary advantage a mortgage broker has over a bank when arranging mortgages?
Access to multiple lenders for better deals
When might an open mortgage be useful to a home buyer?
When planning to move frequently
What is a potential downside of banks compared to mortgage brokers in negotiating mortgage rates?
Banks rarely match rates offered by brokers
In what way does a longer amortization period impact the ability to qualify for a mortgage?
Makes it easier to qualify due to lower monthly payments
What is a feature of an open mortgage that benefits borrowers?
Penalty-free early repayment options
How are contributions to an RRSP treated for tax purposes?
Contributions are fully tax-deductible in the year they are made.
What is the main benefit of having a bank automatically transfer money to a savings account?
It allows for easy saving without temptation to spend.
What happens to earnings made on funds held within an RRSP while they remain within the plan?
They are exempt from tax until withdrawn.
How are withdrawals from an RRSP treated for tax purposes?
Withdrawals are taxed as regular income in the year they are withdrawn.
What is the primary purpose of setting up an RRSP according to the text?
To save for retirement efficiently and with tax benefits.
What percentage of the RRIF balance must be withdrawn in the first year, as stated in the text?
8.5%
What happens to the RRSP or RRIF balance when the owner dies, as per the text?
It is fully taxable and included in the deceased owner's final tax return.
Define a 'Registered Retirement Income Fund' (RRIF) based on the text.
A fund that is converted from an RRSP no later than the year the holder turns 71.
What is the term 'marginal tax bracket' referring to, as mentioned in the text?
The tax rate on the last dollar of income earned.
When do withdrawals from a Registered Retirement Income Fund (RRIF) have to start according to the text?
At age 71, no later than December 31 of that year.
What types of investments can be made within an RRSP, according to the text?
$25,000 in stocks and $15,000 in savings accounts among others.
What distinguishes a single bond from a bond fund?
A bond fund is invested in multiple bonds with varying interest payments and maturity dates.
How are bond funds different from single bonds in terms of maturity?
Bond funds do not mature.
What sets bond funds apart from single bonds regarding interest rate guarantee?
Bond funds guarantee specific interest rates.
How do bond funds vary from single bonds in terms of investment composition?
Bond funds consist of various bonds with different interest rates.
In what way does the composition of a single bond differ from that of a bond fund?
Bond funds consist of multiple bonds with different characteristics.
How do bond funds differ from single bonds in terms of investment risk?
Bond funds expose investors to the risk of varying interest payments and maturities.
Why might an open mortgage be useful for someone expecting to come into a large sum of money soon?
To take advantage of lower interest rates in the short term
What is the significance of the prime rate in the context of lending?
It reflects the average lending rate across all banks
Why is it important for young individuals to establish good spending and debt-management habits early on?
To avoid financial struggles in the future
What are some reasons mentioned in the text why saving money becomes challenging once you have a full-time job and live independently?
Owning a car with associated expenses
In what scenario would someone not benefit from an open mortgage despite expecting a large sum of money?
When they prefer fixed interest rates
Why are early spending and debt-management habits particularly crucial for young people according to the text?
To set them up for financial success in the long run
What does a bond's 'par value' represent?
The predetermined amount to be paid out on its maturity date
Why does the price of a bond change over time?
As a result of changes in prevailing interest rates
What is a 'capital gain' in the context of buying and selling bonds?
The difference between the current market price and the initial purchase price of the bond
How can a bondholder prevent a 'capital loss' when buying and selling bonds?
By holding on to the bond until its maturity date
What is a 'junk bond'?
A high-risk, high-yield bond issued by companies with poor credit ratings
In what situation would a bond be priced higher than its initial offering due to changes in interest rates?
When comparable-term interest rates have increased since issuance
How are contributions to an RESP treated for tax purposes?
Contributions are not tax-deductible but earnings are taxable
How are earnings made on the funds held within an RESP treated for tax purposes when they remain within the RESP?
Earnings are tax-exempt
When withdrawals are made from an RESP to pay for college or university studies, how are they treated for tax purposes?
Withdrawals are taxable in the subscriber's hands
Why might using a TFSA during early savings years be preferable to making RRSP contributions?
TFSA earnings grow tax-free and can be used for various expenses
What distinguishes contributions to an RESP from contributions to an RRSP regarding tax treatment?
Contributions to an RESP are tax-deductible, while RRSP contributions are not
In what way do withdrawals from an RESP after post-secondary education differ in tax treatment from pre-education withdrawals?
Post-secondary education withdrawals are subject to re-capture compared to pre-education withdrawals
What is the minimum percentage of the RRIF’s total value that must be withdrawn annually, starting the year after the RRSP holder turns 71?
5.4%
Which of the following is NOT one of the six items to consider when making individual retirement plans as listed in the text?
How extensive are the post-retirement work-related expenses and payroll deductions?
What tax credit can seniors qualify for upon retirement, if they receive pension or RRIF income?
$2,000 annually
At what age does the minimum withdrawal from a RRIF reach 20% according to the text?
95
What happens to withdrawals from a RRIF in terms of taxes according to the text?
Taxes are payable on all withdrawals
Which of the following is NOT a major change that occurs on retirement as mentioned in the text to help maintain a retiree's lifestyle on lower pension income?
Ability to withdraw funds tax-free from a RRIF
What advantage does pension income-splitting provide to retirees?
It reduces the total amount of tax owed by each partner.
Why is it prudent to shift investment portfolio allocations before retirement age?
To reduce the risk of value fluctuations in the portfolio.
What is one disadvantage of Segregated Funds compared to other managed funds?
Lower control over asset allocation.
What is the primary purpose of pension income-splitting for couples?
To reduce the taxable income of both partners
In what way does shifting towards fixed-income investments before retirement mitigate risk?
It reduces the impact of market volatility
What is a key benefit of utilizing pension income-splitting for tax purposes?
Lower combined tax bill for couples
Study Notes
- The maximum combined OAS and GIS payment for an individual is $1,443 per month in 2017, but only if there is no other income.
- GIS payments are not taxable, and all payments are adjusted quarterly for inflation.
- A Defined Benefit Pension Plan provides a predetermined monthly benefit based on earnings history, years of service, and age. About 80% of public-sector employees belong to this plan.
- A Defined Contribution Pension Plan has specified contribution levels, with the eventual benefit depending on contributions and investment earnings.
- Vesting in a pension plan requires a minimum number of years of employment. If an employee is terminated before vesting, they may not receive the employer's contribution.
- An open mortgage allows for partial or total payment without penalty at the borrower's discretion.
- Travel Medical Insurance covers financial losses related to traveling and is crucial due to high medical costs abroad.
Test your knowledge on mortgage amortization periods, including reasons for choosing a longer period and longest period allowed in Canada. Explore the role of mortgage brokers in helping individuals seek mortgages.
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