Mutual Funds & Securities in Canada

Mutual Funds

• A mutual fund pools money from investors to buy various assets (stocks, bonds, etc.)
• Professionals manage the investment decisions
• Mutual funds are regulated by provincial securities commissions in Canada

Investment Objectives

• Key objectives are Income, Growth, and Safety of principal

Government Securities

• Treasury Bills (T-bills): Short-term, low-risk, low-return securities issued by the government
• Provincial and municipal short-term papers: Short-term, low-risk, low-return securities issued by provincial and municipal governments
• Federal, Provincial, and Municipal bonds: Bonds issued by government bodies

Corporate Securities

• Common shares: Provide ownership, voting rights, and high potential return but are riskier.
• Preferred shares: Provide fixed dividends, priority payments, but usually have no voting rights.
• Bonds: Moderate risk and moderate return
• Commercial paper: Issued by corporations, slightly higher risk, higher return
• Bankers' acceptances: Guaranteed by banks, slightly lower risk, moderate return
• Certificates of deposit (CDs): Issued by banks, low risk, moderate return

Money Market Securities

• Short-term, highly liquid, low-risk investments
• Treasury Bills (T-Bills): Issued by the government of Canada, low risk, low return
• Commercial paper: Issued by corporations, slightly higher risk, higher return
• Bankers’ acceptances: Guaranteed by banks, low risk, moderate return
• Certificates of deposit (CDs): Issued by banks, low risk, moderate return

Bond Prices, Interest Rates, and Yields

• When interest rates rise, bond prices fall.
• When bond prices fall, yields rise.
• When bond prices rise, yields fall.

Bond Risks

• Interest rate risk: Fluctuations in interest rates affect bond prices
• Credit risk: Issuer's inability to repay the principal or interest
• Inflation risk: Loss of purchasing power due to inflation
• Liquidity risk: Difficulty in selling a bond quickly
• Reinvestment risk: Difficulty reinvesting interest payments at the same rate
• Currency risk: Changes in exchange rates affect returns

Bonds in Mutual Funds

• Bonds provide stability and regular income while helping to lower overall risk.

Derivatives

• Financial contracts whose value is derived from other assets (stocks, bonds, or commodities)

Hedging and Speculation

• Hedging: Reducing the risk of adverse price movements
• Speculation: Taking on risk to profit from price movements

Options

• Contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price
• Call option: Right to buy an asset
• Put option: Right to sell an asset

Future Contracts

• Standardized agreements to buy or sell an asset at a predetermined price on a specific future date

National Instruments

• NI 81-102: Regulates the use of derivatives in mutual funds in Canada

Multiple Choice Questions

• Common shares characteristics (Fixed dividend not characteristic)
• Preferred shares vs Common Shares Difference (Preferred shares have fixed dividends and priority over common ones)
• Bonds backed by assets (Mortgage bond)
• Mutual fund mirroring market performance (Index fund)
• Investment converting debt to equity (Convertible bond)

True or False

• Preferred shareholders' voting (False)
• Government bonds risk (False)
• Mutual funds performance (False)
• Purchasing a bond is lending money (True)
• Money market funds risk (False)

Additional Topics

• Diversification (Reduces overall investment portfolio risk)
• Callable Bond (Issuer redeems before maturity)
• ETFs (Traded throughout trading day)
• REITs (Primarily invest in physical real estate)