Investment Planning

Question 1

What is the current securities regulatory framework in Canada?

Answer 1

The provincial securities regulators delegate certain aspects of securities regulation to self-regulatory organizations (SROs) such as the exchanges, the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA).

Question 2

How to calculate bond T-bill yield?

Answer 2

Yield = (Par - Purchase Price)/Purchase Price x (365/Term) x 100

Question 3

What is a corporate bond?

Answer 3

A debt certificate secured by a corporate asset.

Question 4

What is a debenture?

Answer 4

An unsecured bond.

Question 5

What is the default frequency of coupon payment unless stated otherwise?

Answer 5

Coupon is paid semi-annually.

Question 6

How to calculate a mutual fund’s NAV?

Answer 6

NAV = (Fund Assets - Fund Expenses) / Number of Units issued

Question 7

How to calculate a mutual fund’s offering price?

Answer 7

Offering price = NAV / (1 - Load)

Question 8

How to calculate a mutual fund’s redemption value?

Answer 8

Redemption value = NAV x (1 - Load)

Question 9

What does a segregated fund guarantee that mutual fund doesn’t?

Answer 9

Maturity guarantee, death guarantee, creditor proofing, probate protection and insurance protection.

Question 10

What happens when a segregated fund loses its capital (investor doesn’t redeem)?

Answer 10

If a segregated fund loses capital in a given year, the unit holders can claim the capital loss on their taxes and offset any capital gains made on other investments. Mutual fund holders can only do so when selling mutual fund units at a loss.

Question 11

How long can an investor apply a segregated fund’s capital loss?

Answer 11

3 years prior or forward forever.

Question 12

What else is the difference between segregated fund and mutual fund?

Answer 12

Payment of distributions do not reduce the NAV of a Segregated fund the way distributions reduce the NAV of a traditional mutual fund.

Question 13

What are 2 types of registered annuities (fully taxable)?

Answer 13

• Registered Fixed Term-To-age 90

- Life annuity (available through a Life Insurance company only)

Question 14

What are 2 types of non-registered annuities?

Answer 14

• Non-Registered Fixed Term annuity (early tax is higher due to more interest being paid out)
• Prescribed annuity (constant tax owing)

Question 15

What are derivative securities?

Answer 15

Contingent contracts, meaning that the payoff to an investor is dependent or contingent upon some other action occurring (ie. a change in stock price or interest rates).

Question 16

What is a call option?

Answer 16

The party that buys (or is long) a Call Option, has the right, but not the obligation, to BUY the underlying security at a specific price (the exercise price) anytime up to and including the expiration date.
The party that sells (or is short) a Call Option, has the obligation to SELL the underlying security at a specific price (the exercise price) anytime up to and including the expiration date.

Question 17

What is a put option?

Answer 17

The party that buys (or is long) a Put Option, has the right, but not the obligation, to SELL the underlying security at a specific price (the exercise price) anytime up to and including the expiration date.
The party that sells (or is short) a Put Option, has the obligation to BUY the underlying security at a specific price (the exercise price) anytime up to and including the expiration date

Question 18

What are forwards/futures contracts?

Answer 18

Futures and forwards are known as contracts of commitment. Both parties, the buyer and the seller, are committed to follow through according to the contract details.

Question 19

What is a relevant strategy to improve cash flow from using options?

Answer 19

Writing or selling options is considered a strategy to generate income for your portfolio. The income is equal to the premium received.
Buying Put options on securities you already own is a form of portfolio insurance, offering downside protection and upside potential

Question 20

What are the grossed-up and dividend tax credits for both eligible and ineligible dividends?

Answer 20

Eligible dividends: gross up 38% and DTC is 15.02%

Ineligible dividends: gross up 15% and DTC is 9.03%

Question 21

How are stock dividends and dividends reinvested are taxed?

Answer 21

Same way as cash dividend with grossed up amount and DTC.

Dividends paid by “non-Canadian” corporations are taxed as regular income.

Question 22

How is bond interest being taxed?

Answer 22

Annually even when it’s not received yet.

T-bill’s change in value is taxed as interest income.

Question 23

What is systematic risk?

Answer 23

Measured by beta, can’t be diversified.

Question 24

What is bond duration?

Answer 24

Bond duration measures a bond price change relative to a change in interest rate.

Question 25

What is bond convexity?

Answer 25

Convexity measures the rate of price change.

Question 26

What is dollar-weighted return?

Answer 26

The dollar weighted return (DWR) is equivalent to the internal rate of return (IRR), measuring the actual return earned on a beginning portfolio value and on any net contributions made during the period, thus DWR is affected by cash flows to the portfolio.

Question 27

What is time-weighted return?

Answer 27

Time weighted return (TWR) is equivalent to the annualized geometric return, it is unaffected by any cash flows to the portfolio; therefore, it measures the actual rate of return earned by the portfolio manager.

Question 28

What is CAPM or Market Line Formula?

Answer 28

E(R) = Rf + B(Rm - Rf)

Question 29

What is weak form market hypothesis?

Answer 29

Current prices fully reflect all historical stock prices.

Question 30

What is semi-strong form market hypothesis?

Answer 30

Current prices fully reflect all publicly available information.

Question 31

What is strong form market hypothesis?

Answer 31

Current prices fully reflect both private an publicly available information.

Question 32

What are the 4 human errors when it comes to investing?

Answer 32

- Forecasting errors: giving too much weight in recent experience - Overconfidence - Conservatism: slow in responding to news - Sample size neglect

Question 33

What are the behavioral biases?

Answer 33

- Framing: make decisions based on how things are "framed". - Mental accounting: investor takes a lot of risk with one investment account but little risk with another account. - Regret avoidance: investors to blame themselves more for an unsuccessful unconventional investment than an unsuccessful conventional investment. - Loss avoidance (prospect theory): investors are willing to take on more risk when they experience losses and take on less risk as they experience gains. - Illusion of control: investors think they can control how a stock performs in the future.

Question 34

What measures total risk?

Answer 34

Standard deviation (both systematic and unsystematic risk).

Question 35

How to calculate coefficient of variation?

Answer 35

Coefficient of variation = Standard Deviation/Mean