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Questions and Answers
Which of the following is the PRIMARY role of provincial securities commissions in regulating mutual funds in Canada?
Which of the following is the PRIMARY role of provincial securities commissions in regulating mutual funds in Canada?
An investor seeking a portfolio that balances income, growth, and safety should consider which of these mutual fund allocations?
An investor seeking a portfolio that balances income, growth, and safety should consider which of these mutual fund allocations?
A corporation is looking to raise capital quickly without diluting equity. Which type of security would be MOST suitable to issue?
A corporation is looking to raise capital quickly without diluting equity. Which type of security would be MOST suitable to issue?
If interest rates are expected to decrease, how should an investor adjust their bond portfolio to maximize potential gains?
If interest rates are expected to decrease, how should an investor adjust their bond portfolio to maximize potential gains?
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Which of the following risks is MOST associated with holding bonds from a foreign country?
Which of the following risks is MOST associated with holding bonds from a foreign country?
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How do bonds typically affect the risk profile and income generation within a mutual fund?
How do bonds typically affect the risk profile and income generation within a mutual fund?
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An investor prioritizes receiving a steady, fixed income from their investments but is less concerned about capital appreciation. Which type of share would be MOST suitable for this investor?
An investor prioritizes receiving a steady, fixed income from their investments but is less concerned about capital appreciation. Which type of share would be MOST suitable for this investor?
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Considering the general risk-return trade-off, which investment option typically offers the HIGHEST potential return, but also carries the HIGHEST risk?
Considering the general risk-return trade-off, which investment option typically offers the HIGHEST potential return, but also carries the HIGHEST risk?
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Which of the following scenarios best exemplifies the use of hedging with derivatives?
Which of the following scenarios best exemplifies the use of hedging with derivatives?
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An investor holds a call option with a strike price of $50 on a stock. Which scenario would result in the greatest profit for the investor upon exercising the option, ignoring transaction costs?
An investor holds a call option with a strike price of $50 on a stock. Which scenario would result in the greatest profit for the investor upon exercising the option, ignoring transaction costs?
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A portfolio manager is considering using financial derivatives. According to NI 81-102, what is the main regulatory implication for the use of derivatives in Canadian mutual funds?
A portfolio manager is considering using financial derivatives. According to NI 81-102, what is the main regulatory implication for the use of derivatives in Canadian mutual funds?
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Which of the following investors would most likely utilize a put option?
Which of the following investors would most likely utilize a put option?
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What is the primary distinction between speculation and hedging when using derivatives?
What is the primary distinction between speculation and hedging when using derivatives?
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A company issues a bond that can be exchanged for a predetermined number of common shares. What type of bond is this?
A company issues a bond that can be exchanged for a predetermined number of common shares. What type of bond is this?
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Which of the following best describes the strategy of an index fund?
Which of the following best describes the strategy of an index fund?
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An investor seeking a low-risk investment with regular income should consider which of the following?
An investor seeking a low-risk investment with regular income should consider which of the following?
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Which of the following is a key advantage of investing in Exchange-Traded Funds (ETFs) compared to mutual funds?
Which of the following is a key advantage of investing in Exchange-Traded Funds (ETFs) compared to mutual funds?
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An investor is constructing a diversified portfolio. Which statement best reflects the impact of diversification on investment risk?
An investor is constructing a diversified portfolio. Which statement best reflects the impact of diversification on investment risk?
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Flashcards
Derivatives
Derivatives
Financial contracts deriving value from underlying assets like stocks or commodities.
Hedging
Hedging
Using financial instruments to reduce risk of adverse price movements in assets.
Speculation
Speculation
Taking on risk in the expectation of making a profit from price movements in assets.
Options
Options
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Call Option
Call Option
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Put Option
Put Option
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Futures Contracts
Futures Contracts
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NI 81-102
NI 81-102
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Balanced Fund
Balanced Fund
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Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs)
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Mutual Fund
Mutual Fund
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Investment Objectives
Investment Objectives
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Money Market Securities
Money Market Securities
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Bond Prices and Yields
Bond Prices and Yields
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Common Shares
Common Shares
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Preferred Shares
Preferred Shares
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Bond Risks
Bond Risks
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Role of Bonds in Mutual Funds
Role of Bonds in Mutual Funds
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Study Notes
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)
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Description
Explore mutual funds, government securities (like T-bills and bonds), and corporate securities (stocks, bonds, commercial paper). Understand investment objectives such as income, growth and safety. Overview of the Canadian regulatory landscape.
