Overview of Structured Products
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Questions and Answers

What happens when split preferred shares are redeemed early at a premium price?

  • Investors are entitled to a higher yield-on-call.
  • Investors can sell the shares for a higher market price.
  • Investors lose the premium they initially paid. (correct)
  • Investors receive the full premium back.

    • How does a reduced credit rating affect preferred shares in the market?

  • It decreases the yield demanded by investors.
  • It has no effect on the market price of preferred shares.
  • It increases the yield demanded by the market, leading to lower prices. (correct)
  • It increases the market value of the preferred shares.

    • What condition must be met for investors to be affected by a decline in the value of the underlying common shares?

  • It must be sustained over the lifespan of the split preferred shares. (correct)
  • There must be an increase in market interest rates.
  • The decline must match the rate of inflation.
  • The decline must be temporary and recover quickly.

    • What potentially changes the appeal of preferred shares due to taxation?

    <p>Changes to tax rates on capital gains.</p> Signup and view all the answers

    How can investors measure the downside protection of a split-share unit?

    <p>By comparing the net asset value to the redemption price of the split preferred share.</p> Signup and view all the answers

    What is the primary purpose of a zero-coupon bond in a principal-protected note (PPN)?

    <p>To guarantee the return of principal at maturity</p> Signup and view all the answers

    Which of the following best describes the effect of a participation rate on the return of an index-linked PPN?

    <p>It limits the return to a percentage of the index return</p> Signup and view all the answers

    How does a performance cap affect the return on an index-linked PPN?

    <p>It caps the maximum potential return while allowing 100% participation up to that cap</p> Signup and view all the answers

    In the provided example, what was Jomal's initial investment in the PPN linked to the S&P/TSX 60 Index?

    <p>$5,000</p> Signup and view all the answers

    What would Jomal's payout be if the S&P/TSX 60 Index had decreased to 500 after five years?

    <p>$5,000</p> Signup and view all the answers

    Which characteristic defines structured products compared to other investments?

    <p>They are designed to have less risk than their underlying assets while providing higher risk-adjusted returns.</p> Signup and view all the answers

    Which of the following is an example of an underlying asset for structured products?

    <p>Equity indexes</p> Signup and view all the answers

    What is a primary advantage of investing in structured products?

    <p>They provide exposure to pools of underlying assets that individual investors may lack access to.</p> Signup and view all the answers

    Which type of structured product is primarily designed to protect the principal investment?

    <p>Market-linked guaranteed investment certificates (GIC)</p> Signup and view all the answers

    What is a key risk associated with structured products?

    <p>They can provide unpredictable returns with high volatility.</p> Signup and view all the answers

    What is the primary benefit of preferred shares compared to common shares in terms of dividends?

    <p>Preferred shares earn a higher yield due to a lower required investment amount.</p> Signup and view all the answers

    How does a capital shareholder benefit from an increase in the common shares' price?

    <p>They experience a greater percentage gain than common shareholders due to their leveraged position.</p> Signup and view all the answers

    What are capital shares' inherent risks in relation to preferred shares?

    <p>Capital shares hold more risk as they are ranked lower in priority compared to preferred shares.</p> Signup and view all the answers

    What action do managed funds often take to potentially increase profit, according to the provided information?

    <p>Utilizing options and leverage to amplify investment returns.</p> Signup and view all the answers

    What key factor influences both capital and preferred shares, which also affects their overall performance?

    <p>The financial health of the underlying portfolio shares and effective management.</p> Signup and view all the answers

    Study Notes

    Structured Products Overview

    • Structured products offer unique risk, return, tax, and diversification characteristics not found in typical investments.
    • They can reference a single security, a basket of securities, an index, commodities, or combinations.
    • They are designed to offer enhanced yield, capital protection, and tax efficiency.
    • They were created to offer better financing alternatives than conventional products.

    Learning Objectives

    • Summarize advantages, disadvantages, and risks of investing in structured products.
    • Describe features, risks, benefits, and tax implications of principal-protected notes.
    • Describe the structure, risks, and tax implications of market-linked guaranteed investment certificates.
    • Explain the structure, risks, and tax implications of split shares.
    • Describe the securitization process for asset-backed securities.
    • Detail asset-backed commercial paper and mortgage-backed securities.

    Overview of Structured Products

    • Structured products use a predetermined return/risk profile for financial engineering, which tracks underlying assets.
    • Underlying assets can include a single security, a basket of securities, foreign currencies, commodities, or an index.

    Principal-Protected Notes (PPNs)

    • PPNs are bank-issued debt instruments.
    • PPN returns are tied to the underlying asset's performance.
    • PPNs guarantee the return of principal at maturity, but interest payments are not guaranteed.
    • Regulation for PPNs in Canada treats them as bank deposit notes, not securities.

    Market-Linked Guaranteed Investment Certificates (GICs)

    • Market-linked GICs are fixed income securities with guaranteed principal and interest.
    • Their returns are linked to the performance of an underlying asset, like a stock index, a mutual fund, or an ETF.

    Split Shares

    • Split shares are securities that divide a portfolio of common shares' attributes into different components.
    • These vehicles are issued by split share corporations, essentially closed-end funds.
    • They come in two main types: preferred shares that get most dividends and capital shares that get most capital gains, for example.

    Asset-Backed Securities(ABS)

    • Asset securitization is a process combining financial assets (mortgages, loans) into marketable securities (ABS).
    • It involves an originator, a special purpose vehicle (SPV), and an issuer.

    Asset-Backed Commercial Paper (ABCP)

    • ABCP is a type of ABS maturing within one year.
    • Its repayment relies on cash flows from underlying assets.

    Mortgage-Backed Securities (MBS)

    • MBSs are a class of structured products based on mortgage assets (e.g. residential).
    • They represent a stake in the pooled payments of a mortgage portfolio.

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    Structured Products PDF

    Description

    This quiz explores structured products and their unique investment characteristics. It covers the advantages, risks, and tax implications of various products like principal-protected notes and market-linked investment certificates. Understand the key features that make structured products advantageous for diversification and capital protection.

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