UNIT 5 Review PDF

Section 1: short answers What is a mutual fund?​ A mutual fund is an investment fund that collects money from many investors to buy a mix of different securities, such as stocks, bonds, and other assets. It is managed by professionals who make investment decisions on behalf of the investors. In Can...

Section 1: short answers What is a mutual fund?​ A mutual fund is an investment fund that collects money from many investors to buy a mix of different securities, such as stocks, bonds, and other assets. It is managed by professionals who make investment decisions on behalf of the investors. In Canada, mutual funds are regulated by provincial securities commissions. What are the 3 main investment objectives? Income, Growth, and Safety of principal Name securities issued by Governments Treasury Bills (T-bills) Provincial and municipal short-term papers Federal, Provincial, and Municipal bonds​ Name securities issued by Corporations Common shares Preferred shares Bonds Money market securities What are money market securities? Name 4 types and discuss the risk versus returns:​ Money market securities are short-term, highly liquid, and low-risk investments. The 4 types are: Treasury Bills (T-Bills): Issued by the Government of Canada, very 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.​ Discuss the relationships between bond prices, interest rates, and yields: When interest rates rise, bond prices fall. Yield is the return an investor earns on a bond. When bond prices fall, yields rise, and when bond prices rise, yields fall. Name the six main types of risk associated with investing in bonds: Interest rate risk Credit risk Inflation risk Liquidity risk Reinvestment risk Currency risk What does having bonds in a mutual fund do?​ Bonds provide stability and regular income to a mutual fund while helping to lower overall risk​. What are common shares and preferred shares? Discuss: Common shares: Give ownership, voting rights, and potential for high returns but are riskier. Preferred shares:Provide fixed dividends and priority in payments but usually have no voting rights. Discuss the risk and returns of cash, money market, bonds, debentures, preferred shares, and common shares: Cash: Lowest risk, lowest return. Money market: Low risk, low return. Bonds: Moderate risk, moderate return. Debentures: Higher risk than bonds, higher return. Preferred shares: Moderate risk, fixed dividends. Common Shares: Highest risk, highest potential return. Define Derivatives in finances:​ Derivatives are financial contracts whose value comes from other assets like stocks, bonds, or commodities. Define Hedging and speculation:  Hedging: Using financial instruments to reduce or offset the risk of adverse price movements in an asset. Speculation: Taking on risk in the hope of making a profit from price movements in an asset. What are options? How does a call option work? How does a put option work? Options: Contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price before or on a specific date. Call option: Gives the holder the right to buy an asset at a specified price. Put option: Gives the holder the right to sell an asset at a specified price. What are futures contracts?​ Futures contracts are standardized agreements to buy or sell an asset at a predetermined price on a specific future date. What NI (National Instrument) regulates the use of derivatives in mutual funds?​ NI 81-102 regulates the use of derivatives in mutual funds in Canada. Section 2: multiple choice 1.​ Which of the following is NOT a characteristic of common shares?​ b) Fixed dividend payments 2.​ What is the primary difference between preferred shares and common shares?​ c) Preferred shares provide fixed dividends and priority over common shares in asset distribution​ 3.​ Which of the following bonds is backed by specific assets of the issuing company?​ c) Mortgage bond​ 4.​ Which type of mutual fund aims to mirror the performance of a specific market index?​ c) Index fund ​ 5.​ What type of investment product allows an investor to convert debt into equity at a later date?​  b) Convertible bond​ 6.​ Which of the following is considered a low-risk investment?​ b) Government Treasury Bills​ 7.​ A mutual fund that invests in both stocks and bonds is referred to as a:​ c) Balanced fund​ 8.​ What is the main advantage of investing in a Real Estate Investment Trust (REIT)?​ b) High liquidity compared to owning property directly​ 9.​ Which of the following statements about exchange-traded funds (ETFs) is TRUE?​ c) They are traded on stock exchanges like individual stocks.​ 10.​Which investment product is designed to provide regular income with minimal risk to the principal?​ b) Treasury Bills (T-Bills)​ Section 3: True or False 1.​ Preferred shareholders always have voting rights in the company.​ False​ 2.​ Government bonds are generally considered riskier than corporate bonds.​ False​ 3.​ Mutual funds are guaranteed to outperform the market.​ False​ 4.​ An investor purchasing a bond is essentially lending money to the issuer.​ True​ 5.​ Money market funds invest in short-term, high-risk securities.​ False​ 6.​ Diversification helps reduce the overall risk of an investment portfolio.​ True​ 7.​ A callable bond can be redeemed by the issuer before its maturity date.​ True​ 8.​ ETFs can be traded throughout the trading day, similar to stocks.​ True​ 9.​ REITs primarily invest in physical real estate properties.​ True​ 10.​The primary goal of growth mutual funds is to generate regular income.​ False​