IFIC Final Review - Overview of all course material PDF

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CSI: Investment Funds in Canada Chapter 1: The Role of a Mutual Funds Representative Items

Answers

1. No more than four pages in length; gives investors key information relevant to investment decisions.

Fund facts

2. You must use due diligence to learn the essential facts relevant to every order.

Know your client

3. Greater detail of key information relevant to investment decisions; greater in length.

Prospectus

4. An understanding of how the product is constructed and how it is likely to perform in various market conditions.

Know your product

Items

Answers

1. Complying not only with the letter of the law but also with the spirit of the law.

Ethical conduct

2. The potential volatility in returns or the range of possible future outcomes on the price of a security.

Risk

3. Following the rules, whether those rules are legal requirements or dealer policies.

Compliance

4. Moral principles that go beyond prescribed behavior.

Ethics

You’re Responsibilities and Your Client

Matilda has declared that she cannot feel comfortable with any loss of her investment capital. Identify the term used to refer to Matilda’s attitude towards investments. Risk Averse People who cannot tolerate risk are risk adverse.

A client wishes to purchase a mutual funds that is not a suitable investment based on his current financial situation. In refusing the client, the mutual funds sales representative has specifically satisfied which one of the following responsibilities? Legal The mutual fund sales representative has a legal responsibility to ensure that only suitable investments are recommended. A mutual fund investment is suitable if it fits the client’s goals, financial condition, personal circumstances, and investment knowledge and risk tolerance.

What does ‘knowing your products’ mean for mutual fund sales representatives? Using the Characteristics of the mutual funds being recommended. Understanding the characteristics of mutual funds means being aware of the types of risk they present to clients, sales charges, annual fees, conditions and cost when the investor decided to sell and type of income that the fund earns.

Which of the following statements best describes the “know your client” regulatory rule? Learn the essential facts relevant to every client order. The “know your client” KYC rules states that the mutual funds sales representative must use due diligence to lean the essential facts relevant to every client and every order. Information concerning the clients financial status (both income and net worth), family and other comments, as well as financial goals is required in an order to make a suitable investment recommendation.

Which of the following is not a basic responsibility when dealing with clients? Performance responsibility – When dealing with clients, you have three different types of responsibility: Legal Responsibility- To ensure any investment your recommend or client order that you accept is suitable for the client. Ethical Responsibility- Place your clients’ needs before your own (such as a sales target). Professional Responsibility – To provide the best client service possible.

Select the term used to refer to the potential fluctuations in returns or the range of possible future outcomes in the price of a security.

Risk Risk is the potential volatility in returns or the range of possible future outcomes on the price of a security.

Identify the individual responsible for helping clients to establish household budgets and savings goals. Financial planner At the same time there are limits to your role. Clients generally are looking for solutions to attain financial goals through mutual fund offerings, however, your role does not extend to helping clients with developing a financial plan through establishing household budgets, for example. This would be a role of a financial planner.

Identify the person responsible for investments in a fund according to the funds policies and objectives based on a particular investing style. Professional Money Managers Professional money managers manage the funds’ assets by investing the proceeds according to the funds policies and objectives and based on a particular investing style.

Identify one of the criteria that must be evaluated in deterring the suitability of an investment for a client. Client’s investment objectives Suitability means ensuring that all recommendations take into account the client’s unique situation and investment objectives.

Define a term that is used to refer to the requirement to follow legal requirements and dealer policies. Compliance. Compliance means following the rules, weather those rules are legal requirements or dealer policies.

Anya is evaluating the financial and investment goals for a client. Identify the responsibility she is completing. Know your client. The KYC rules states that you must use due diligence to learn the essential facts relevant to every client order. Information concerning the client’s financial status (both income and net worth), family and other commitments, as well as financial goals, is required to make an appropriate investment recommendation.

Bettina’s client askes for advice on stocks Identify the action that Bettina, a mutual fund salesperson, may take. Refer the client to someone licensed to sell equities. If you think that a particular client would be interested in individual stocks, then he or she must be directed to a salesperson who is registered to sell those securities.

Basir’s client informs him that she needs to have $75,000 available in 10 years for her daughter’s university education. Identify how the KYC component that this applies to. Knowing financial goals and objectives. Knowing your clients means knowing there: Financial goals and objectives Circumstances Personal Circumstances Investment Knowledge Ability to Tolerate Risk These components are interrelated. Clients often state their financial goals and objectives with a particular set of targets in mind.

Shawn, an employee of a major Canadian bank, has finalized his license as a mutual funds salesperson. Identify the next step that he must take to achieve his goal of acting as a mutual funds sales person. Registration with the provincial securities commissions. Once the licensing requirements have been met, the application for registration is handled either by your employer or if you are working independently, by a sponsoring financial services team.

Define the term that is used to refer to the fluctuation of mutual find prices. Volatility. You next explain that this problem of fluctuating value (known as volatility) is not as pronounced with most bond funds and hardly exists at all with money market funds.

A court reviews the investment purchases of a client and determines that the client had a high degree of reliance on the advice of the sales person. Identify the legal principle the court has confirmed. Fiduciary duty.

Criteria that may be used to determine whether a fiduciary duty is present in a mutual funds sales representative – client relationship include a high degree of reliance by the client on the representative’s advice and the vulnerability of the client.

Determine the client who is most likely to have a high degree of risk tolerance: Bob, retied on a pension; Rebecca, a student in an MBA program; Kian, a newly married father of one; Sasha, a 30-year old lawyer in an established practice. Sasha Think of risk in the following terms: Those who are willing to assume risk are referred to as risk tolerant. Weather a client is risk averse or risk tolerant depends on a certain extend on a number of psychological factors. It also depends on how well you understand the nature of investments you consider. Changing personal circumstances, such as the arrival of a new baby can have a dramatic impact on a client’s willingness to take on investment risk. Risk tolerance is also related to age: younger clients may be less risk averse than older clients. The vast majority of people are risk averse to some extent. The will assume risk only of the potential reward is high enough.

Abishna holds 10,000 units of a mutual fund with 1,000,000 units outstanding. Calculate the amount Abishna will receive if the firm distributes $250,000 in investment income. $2,500 Individuals who contribute money become share or unit holders in the fund and share in the income gains, losses and expenses the fund incurs in proportion to the number of units or shares that they own. Calculation: $250,000 Investment Income / 1,000,000 units = $0.25 per unit x 10,000 units = $2,500

Marie has $40,000 to invest and will need the fund in 2 years. She has a low level of risk tolerance. Determine the type of mutual funds that a sales person could recommend. Money Market Mutual Fund Safety of principal and liquidity are of prime importance for money market funds. Given the factors gar Marie has a low level of risk tolerance and will need the funds in 2 years, money market fund is the most suitable product in these circumstances.

A firm has made a new mutual fund available for sale. It is an equity fund that will invest in shares of a new start-up technology company. Determine the client that would most likely be suitable for this investment. Martha, a risk-tolerant Canadian banking executive. A person’s risk tolerance has two components. The first is psychological, as some people by their nature are more risk tolerant that others, This psychological ability to bear risk changes as people

age, with a tendency for people to come more risk averse as they get older. The second component of risk tolerance has to do with an individual’s personal circumstance, financial circumstances and investment knowledge. Since Martha is a risk-tolerant Canadian banking executive, this specialty fund might be suitable for her.

Rae wishes to retire in 15 years with 1 million dollars. She is single with no dependents, earns $100,000 annually and saves 30% of her income. She is risk averse with good investment knowledge. Determine the KYC factor that may prevent her from reaching her goal solely based on this information. Ability to tolerate risk. People who cannot tolerate risk are called risk averse. Those who are willing to assume risk are referred to as risk tolerant. Whether a client is risk averse or risk tolerant depends to a certain extent on a number of psychological factors. It also depends on how well you understand the nature of the investments you consider. Changing personal circumstances, such as the arrival of a new baby can have a dramatic impact on a client’s willingness to take on investment risk. Risk tolerance is also related to age: younger clients may be less risk averse than older clients. The vast majority of people are risk averse to some extent. They will assume risk only if the potential reward is high enough.

Marc has requested his salesperson to purchase a mutual fund that the salesperson considers suitable. She refuses to put the purchase through, as Marc is an unpleasant client who she wishes would work with another sales person. Identify the responsibility that the sales person has violated. Professional Responsibility. You must provide the client with the best service possible.

Emma’s elderly client has complete trust in her abilities. She has to reach a sales target for the month. She believes that an investment is suitable for him and persuades him to place and order. Identify the consecration that applies in evaluating her actions. Ethical Responsibility. You mist place your clients’ needs before your own needs (such as reaching a sales target) or those of your dealer.

A client directs his salesperson to make an investment in a mutual fund but the sales person cannot determine if the investment is suitable. Identify the action that the salesperson must take. Refuse the order.

If you cannot determine investment suitability but go ahead and accept the clients order, hey you will have violated securities law.

Mareet has assets of $85,000, bank loans of $15,000 and a car loan of $20,000. Calculate her net worth. $50,000 Net worth is the value of all the clients assets after subtracting outstanding loan and mortgage balances. $85,000 Assets - $35,000 Liabilities = $50,000 Net Worth

Chapter 2 – Overview of the Canadian Financial Marketplace Identify an indirect investment from the following list. An avid investor buys shares in a new issue. Capital savings can also be harnessed indirectly through the purchase of such representational items as stocks, bonds or mutual funds or through the deposit of savings in a financial intuition.

Which of the following is a characteristic of capital? Sensitive to the environment. Capital has three important characteristics. It is mobile, sensitive to its environment and scarce. Therefore capital is extremely selective.

When will foreign users want Canadian capital?

When $1 foreign currency = 1.5 Canadian dollars.

Foreign users will want Canadian capital if they feel they can access this capital at a less expensive rate then their own currency.

How do municipalities raise capital to finance services for their communities that are expected to last for 20 or more years? Issuance of installment debentures. Municipalities are responsible for provision of streets, sewers, waterworks and other services for individual communities. Since many of the assets are used to provide these services are expected to last for 20 or more years, municipalities attempt to spread their cost over a period of years through the issuance of installment debentures (serial debentures).

XYZ Company decided to raise funds to finance a new production plant. XYZ issued a security to the general public that gives the investors and ownership stake in the company. Identify the security that XYZ issued.

Shares

Equities are usually referred to as stocks or shares because the investor actually buys a “share” of the company, thus gaining an ownership stake in the company.

Identify the investment product that is based in underlying securities. Derivatives Derivatives are products based on or derived from an underlying instrument, such as a stock or an index.

Identify a unique feature of an open ended fund. Investor can buy it and sell it directly from the fund. An investment fund is a company or trust that manages investment for its clients. The most common form is the open-end fund, also known as a mutual fund.

Which if the following is fundamental to the operation of the stock exchange? Liquidity. Liquidity is fundamental to the operation of an exchange.

Select the exclusive exchange for financial futures and options in Canada. MX The Montreal Exchange is the exclusive exchange or financial futures and options in Canada.

What does the term Over-the-Counter refer to? Dealer Market Dealer markets are referred to as over-the-counter (OTC) or as unlisted markets – securities on these markets are not listed on an organized exchange as they are on auction markets.

Which would be excluded form a list of factors that limit our ability to buy and consume as much as we need? Accessibility of financial information. Most of us would like to have more of what we have or at least be able to buy or consume as much as we can. In reality this is not possible because our spending habits are constrained by the amount of income we earn and by the fact that there is a limit to what an economy can produce during a given period. Because scarcity prevents us from having as much as we would like of certain goods, the performance of the economy hinges on the collectible decisions made by millions of individuals.

Identify the role of capital investment in the economy. Creating growth Capital investment affects the economy by creating growth when it is used productively, through either direct or indirect investment. An adequate supply of capital is essential for Canada’s well-being. In manufacturing, for example, capital supplies the means to expand facilities, improve productivity, increase competitiveness in domestic and foreign markets, and develop innovative sought-after new products. When capital investment is deficient, industry slackens, unemployment rises and living standards decline.

Non-Financial domestic corporations are sources of capital. Identify what role these corporations play in capital markets. Not significant providers of permanent funds. Non-financial Canadian corporations do generate large savings, mainly in the form of the corporations earning. However, these internally generated funds are usually retained by the corporation and are available only for internal use; they are not normally invested in other companies stocks and bonds. Thus, corporations are not significant providers of permanent funds to others in the capital market.

Identify the typical role of foreign investors in Canadian Capital Markets. Direct investment in Canadian Industries. Foreign investors, both corporate and individual, have long regarded Canada as a good place to invest. Canada, in turn, has traditionally relied on foreign savings for direct investment in Canadian industries, as well as indirect portfolio investment in Canadian securities.

Items

Answers

1. The federal government finances expenditures

T-bills and marketable bonds

using

2. Business may issue

preferred and common shares

3. Individuals may use capital for

mortgages

4. Municipal governments may issue

instalment debentures

Identify the most complete definition of capital. Capital represents the invested savings of individuals, corporation, governments and other organizations and associations. It is in short supply and is arguably the world’s most important commodity.

Which of the following would be considered a direct investment? A down payment for a new home. Capital savings can be used directly by a couple investing their savings for a new home.

XYZ is a company that wants to invest in another country (ABC County). Identify the risk evaluation measure that will most likely encourage XYZ to make that decision. The political environment is ABC Country is relatively stable. The decision as to where capital will flow is guided by country risk evaluation, which analyzes such things as a stable political environment.

Compare retail investors to institutional investors. Retail investors trade securities for their own personal account while institutional investors trade for other investors. Retail investors are individual investors who buy and sell securities for their own personal accounts and not for another company or organization.

Select a substantial source of capital for Canadian businesses. Profits retained in the business. Canadian business require massive sums of capital to finance day-to day operations, to renew and maintain plant and equipment as well as to expand and diversity activities. A substantial part of these requirements is generated internally (e.g. profits retained by the business)

Identify the securities type that is suited mainly for vary sophisticated investors. Options Derivatives are suited for sophisticated investors. Derivatives are products based on a derived from an underlying instrument, such as a stock or an index. The most common type of derivatives are Options and Forwards.

What monitors the conduct of the SROs (Self-Regulatory Organization)? Provincial Securities Commission.

How...