95%

IFIC

Units 5 – 6 – 8 – 2 – 11 – 9 – 10 – 3 – 6 – 1

UNIT 5 – TYPES OF INVESTMENTS

 Mutual funds provide safety of capital and some income

1. Income oriented are typically fixed income securities
2. Income investments experience more price fluctuation

Growth – equities

Short term – 0 – 3(5) years

Med Term – 5 – 10 years

Long term – 10 yr plus

Bankers Acceptance – 1 – 3 months

T bills – safety of principal and income

- Low risk

Primary Market

- Gov’t does a 2 week auction where t-bills are sold to investment dealers
o Terms offered are 98, 182, 364 days

Secondary Market

- T-bills change in price relative to interest rates

o Inversely related; just like bonds
o Subject to capital gains/losses

BONDS

- Maturity greater than 1 year

- Pay regular coupon payments – semi annual
- Traded OTC
- coupon payment = [(face value x coupon rate) ÷ number of payments per year]

Debentures

- medium risk, unsecured bonds

95%

Convertible bonds are higher risk than regular bonds because they have less priority over debtors,
however

- offer lower coupon payment in exchange for option

- option exchanged within preset time at preset price

Extendible bonds – can extend the bond if interest is paying well

- receive a lower rate of return for the option

Retractable – by the bond holder to redeem it before maturity at par

- good if coupon rate is lower than current interest rates (they rose)

ZERO COUPON BONDS

- held in RRSP to shelter the income

- no income received but tax otherwise paid

MORTGAGE BONDS

- fixed income securities that invest in a pool of mortgages

o offers regular interest income and safety of principal

CANADA MORTGAGE BONDS

- invested in a pool of Mortgaged backed-securities

o collection of mortgages packaged into a security and sold to investors
o offers interest and principal
- CMB’S are guaranteed by the CMHC (Canadian mortgage and housing corporation – insurane
provider) and by the GOV of CAN

Objective

Stable income and safety of principal

- Interest and capital gains

- Low risk because they are backed by physical assets and insured

Current Yield

Potential return on investment – based on market price of bond and coupon payment

Current Yield = (Coupon Payment / Market Price) x 100

95%

YTM – yield to maturity

- Factors in the return of principal therefore is considered more accurate

- The timing of payments, the price of the bond and time to maturity
o Unlike current yield – it assumes all coupons reinvested at the same rate

Direction of Interest Rates Bond Price Curre

Stable or no change $100 or trading at “par” Current Yield eq

trading at a “discount”,
Increase Current Yield grea
less than par value

trading at a “premium”,
Decrease Current Yield les
greater than par value

Upward sloping curve shows that longer term b

Normal Yield Curve yields than shorter term bonds due to the highe
bonds. The higher yield reflects investors’ expec
rise in the future.

This downward sloping curve shows yield on sh

Inverted Yield Curve higher than long-term bonds that suggests that
to decline. This can be a sign that a recession is

A flat yield curve shows that short and long-ter

Flat Yield Curve almost the same return. It usually indicates the
trying to determine the direction of interest rat
moves from normal to flat this can signal an ec

Reinvestment Risk – the risk that coupon payments will be invested at a lower interest rate than the
original one (price of bond goes up when interest goes down)

EQUITIES
95%

Preferred Shares
Characteristics
Type
Convertible Preferred Gives the shareholder the option to convert shares into a fixed number
Shares of common shares at a predetermined price within a specified period.
Offers the opportunity to receive additional dividends if the company's
Participating profit exceeds a stated level. May also have provision that entitles
Preferred Shares investors to receive an additional amount of the company's assets if the
company is liquidated.
Requires that unpaid dividends accrue and be paid in full before
Cumulative Preferred dividends are paid to common shareholders. Non-cumulative dividends
Shares do not carry forward missed payments (dividends may be missed if the
company does not make a profit).
Callable
Allows the issuer to redeem the preferred shares at a pre-determined
(Redeemable)
price within a defined period.
Preferred Shares
Retractable Preferred Entitles the shareholder to sell the shares back to the issuer at a pre-
Shares determined price and time in the future.
Common Share Preferred Share
Long-term capital appreciation
Investment Objective Stable dividend income
and potentially income

Capital gain and potentially

Expected Return Dividend Income
dividend income

Risk Level Moderate to high Low to moderate

Limited, usually trades around

Potential Gain Unlimited
par value

Potential Loss Up to 100% of capital invested Up to 100% of capital invested

DERIVATIVES
95%

Options – Futures – Forwards

Hedging – taking an offsetting position to protect against adverse price movements

Joe is a soy bean farmer. He wants to ensure that he can sell his crop at a particular price to cover all his
costs and to allow him to make a profit. Instead of waiting until he harvests his crop, Joe enters into a
derivative contract now to sell his crop at a specified price on a specified date. By entering the contract,
Joe guarantees the price he will receive for his crop.

Speculative Trading – buying and selling in a short time for an appreciable gain

Indira is a speculative trader. She enters into derivative contracts to buy corn but does not ever intend to
purchase the corn or take delivery. She is betting that the price of corn will appreciate substantially over
the next few weeks. Before the contracts expire, she must enter into offsetting contracts to close out the
transaction so that she does not have to fulfil the purchase and delivery requirements of the contracts.

 Call options allow the option buyer the right to buy an underlying security at a pre-
determined price. They are used when an investor believes the security price will go up
in the future.
 Put options allow the option buyer the right to sell an underlying security at a pre-
determined price. They are used when an investor believes the security price will fall in
the future.

Type of Contract Option Buyer Option S

Call Right to buy an underlying security Obligation to sell an u

Put Right to sell an underlying security Obligation to buy an u

[long]Buying (holder)a call – price goes up (@20 buy call @ 23)

[short]Selling (writing) a call – agree to sell at pre determined price in pre determined future
time span

FUTURES – operate the same way but a legal obligation to sell

FORWARDS
 95%

- Allows to buy a stock, bond or currency, at a pre set price at a specific future date
o Locking in exchange rate for payments

Jerome is a pension fund portfolio manager. He has finalized a deal to fund an infrastructure project in
Germany. The agreement stipulates that he make three lump sum instalments: one in six months, the
second in a year, and the third in three years. Jerome can enter into a forward contract that will lock in
the Canadian-Euro exchange rate at those three points in time. By doing so, Jerome is assured the
exchange rate now that he will have to pay in the future.

Forward Contracts Futures Contracts

Not traded on a centralized exchange, but
Traded on the futures exchange
through a broker-dealer
Customized contracts, negotiated between
Standardized contracts
buyers and sellers through broker-dealers
No clearinghouse, therefore it is possible
Has a clearinghouse that ensures buyers and sellers
that buyers and sellers may default on
follow through on the contract
contracts

Mutual funds that purchase funds outside of Canada might hedge risk with currency

The provincial securities commission regulates the use of derivatives in mutual funds. The rules are
stated in National Instrument
(NI) 81-102.
95%

UNIT 6

TYPES OF MUTUAL FUNDS

- First fund was 1932 – CI Canadian Investment Fund

- Canadian Investment Funds Standards Committee (CIFSC) sets the standards used to classify
mutual funds into specific categories
o based on the mutual fund's investment mandate and the securities it holds

Money Fixed Income Funds Balanced Funds Equity Funds

Market Funds

- money market funds - mortgage funds - balanced funds - equity funds (based on - labo
- bond funds - tactical asset allocation market capitalization) invest
funds - Canadian dividend funds - real
- target date funds - global equity funds - com
- international equity funds
- sector funds
Mutual funds must hold cash – but portfolio managers have discretion to hold some assets outside the
primary mandate of the fund

Mutual Fund Income

 the likelihood the income will be earned

 the frequency of the income
 the tax implications of the income

Mutual Fund Investment Objective Type of Income Invests in

money market
safety and income interest money market securities low
funds
interest and some capital low,
fixed income funds steady income bonds
gains med
income and long-term interest, dividends, and
balanced funds equities and bonds low t
growth capital gains
capital gains, dividends, and med
equity funds long-term growth equities
other income high

equities, real estate,

capital gains, dividends, and
specialty funds long-term growth commodities, and other high
other income
investments
95%

The risk classification of mutual funds is measured by the fund's historical price volatility, which is the
amount and frequency of the net asset value per unit (NAVPU) fluctuations over time

LOW RISK MUTUAL FUNDS

 money market funds

 low risk, high quality income securities, protection of principal and income
 maturity of 1 year or less
 weighted term to maturity of portfolio must not exceed 180 days
 pay interest on a monthly basis

Investment Objective Safety and Income

Type of Income Interest

95%

Holdings Treasury bills (T-bills), bankers' acceptances, commercial paper,

provincial and municipal short-term paper domiciled in Canada.
U.S. Money market funds are similar to Canadian money market
funds but securities are denominated in U.S. currency.

Client Suitability For investors who want principal protection and some income. Due to
their low return, money market funds are better suited for short-term
goals such as saving for an emergency fund. They can also be used as
a temporary investment before investing in other mutual funds.
U.S. money market funds are for investors who want to preserve their
U.S. money for a short-term.

Risk Classification Low

Mortgage Funds Profile

- The fund experiences lower price volatility than bond funds because its average term to
maturity is usually under five years, which is lower than the average term to maturity of bond
funds.
- Also, mortgages held in the fund are guaranteed by the Government of Canada

Investment Objective Steady income

Type of Income Interest and some capital gains

Holdings Commercial, industrial and residential mortgages, as well as short-term fixed

income securities.

Client Suitability Investors who want income on a monthly basis.

Risk Classification Low

 fixed income funds

 mortgage funds
 bond funds
 balanced funds
 balanced funds
 tactical asset allocation funds
95%

 target date funds

BOND FUND

Investment Objective Steady income

Type of Income Interest and some capital gains

Holdings Bonds

Client Suitability Investors who want stable income.

Risk Classification Low, Low to Medium, Medium

Balanced funds – have a minimum and maximum amount for each asset class

tactical asset allocation - Tactical asset allocation is when a portfolio manager temporarily changes the
asset allocation from its strategic asset mix, in order to take advantage of short term opportunities in the
market.

strategic asset allocation - The portfolio manager analyzes the long term expected returns and risk levels
of each asset class to set a target asset mix that would match the requirements of the balanced fund.

- May periodically be rebalanced to meet the original asset allocation

Investment Objective Income and long-term growth

Type of Income Interest, dividends, and capital gains

Holdings Common shares (equities) and bonds

Client Suitability Investors who want income and growth.

Risk Classification Low to Medium, Medium

Tactical Asset Allocation Funds

- While balanced equity funds have to have minimum and maximum amounts to the asset
allocation class, a tactical asset allocation class has no restrictions

Investment Objective Income and long-term growth

Type of Income Interest, dividends, and capital gains

95%

Holdings Common shares and bonds

Client Suitability Investors seeking income and growth.

Risk Classification Low to Medium, Medium

- Risk typically higher than balanced funds because there are no restrictions

Target Date Funds

- Also known as Life-Cycle funds

o Focuses on a specific future date and changes the asset allocation during the life of the
fund
 Objective is balanced income and long term capital growth, relative to the target
date
o Pick a date – retirement, education
 Hold equities in he beginning, and towards fixed income at the end

Investment Objective Income and growth

Type of Income Interest, dividends, and capital gains

Holdings Common shares and bonds

Client Suitability Investors who want the convenience of having the mutual fund de
with asset allocation and fund re-balancing.

Risk Classification Low to Medium, Medium

Growth Oriented Mutual Funds

- Long time horizon and high levels of risk

o Can be steady growth
o Or aggressive speculative growth

EQUITY FUNDS

- All equity funds plus sector funds

SPECIALTY FUNDS
95%

- Commodity pool
- Labour Sponsored Investment Fund
- Real Property Fund

Market cap – the total value of a corporations outstanding shares

 small market capitalization (small cap) - smaller companies (e.g. between $100 million
and $1.5 billion)
 medium market capitalization (medium or mid cap) - medium sized companies (e.g.
between $1.5 billion to $5 billion)
 large market capitalization (large cap) - large, established companies, often called blue
chip (e.g. over $5 billion)

Investment Objective Long-term growth

Type of Income Capital gains, dividends, and other income

Holdings Primarily invested in common shares but may also hold preferred
shares.

Client Suitability Investors with a higher risk tolerance and longer time horizon.
Investors need to be able to withstand the potential losses that m
occur.

Risk Classification Medium, Medium to High, High

Canadian Dividend Fund – invests in Canadian dividend paying corporations

- objective: income and long term growth

- the risk level is higher than that of bonds because the common shares valuation effects the
stability of the preferred shares
o dividend paying shares are less volatile than non paying

Investment Objective Income and growth

95%

Type of Income Dividends and capital gains

Holdings Invests primarily in common shares of Canadian corporations that

regularly pay dividends. May also hold preferred shares.

Client Suitability Investors who want steady tax-preferred income and the
opportunity for some long-term capital growth.

Risk Classification Medium

Canadian Equity Fund – invest in Canadian corporations for long term capital growth

- may receive income from the mutual fund in form of capital gain and dividend

Investment Objective Long-term growth

Type of Income Capital gains, dividends, and other income

Holdings Common shares of Canadian companies

Client Suitability Investors seeking capital growth over the long term. These investo
should be able to tolerate some short-term price volatility.

Risk Classification Medium,

Medium to High,
High

Global Equity Funds

- long term capital growth

- susceptible to market risk, business risk, currency risk, everything risk!

Investment Objective Long-term growth

Type of Income Capital gains, dividends, and foreign income

95%

Holdings Common shares of foreign, Canadian, and U.S. companies

Client Suitability Investors who seek growth from investment opportunities around
the world including North America.
Canada represents less than 5% of the global market, and its mark
is largely concentrated in three sectors: energy, finance and
materials. Global equity funds provide the opportunity for Canadia
investors to gain broader diversification into different markets.

Risk Classification Medium,

Medium to High,
High

International Equity Funds

- ONLY HOLDS SECURITIES ISSUED BY FORIGN CORPORATIONS

o Emerging markets provide inflated risks

Investment Objective Long-term growth

Type of Income Capital gains and foreign income

Holdings Common shares of foreign companies

Client Suitability Investors who already have Canadian and U.S. investments, and
want to add international investments to their portfolios.

Risk Classification Medium,

Medium to High, High

Sector Funds

- Mutual funds with a narrow investment focus, like the majority of the above the focus is on long
term capital appreciation
- Related to particular investment mandate
o Sector or industry: technology, healthcare, natural resources, financial services, precious
metals
- Higher risk than diversified equity funds (of any kind) because of the narrow investment focus
95%

Investment Objective Long-term growth

Type of Income Capital gains, dividends, and other income

Holdings Common shares of corporations in a specific industry, sector, or

geographical region

Client Suitability Investors who have a higher risk tolerance. Their concentrated
portfolios mean investors' fortunes are tied to the prospects of the
specific industry, sector, or geographic region. Investors should hav
a long time horizon to weather the volatile nature of sector funds.

Risk Classification Medium to High, High

Labour Sponsored Investment Funds

- Provide money to Canadian start-up companies

o LSVCC’s (labour sponsored venture capital corporations)
o Long term capital appreciation WITH tax benefits

- LSVCC’s provide start up capital to businesses for a share in their ownership

o 15% tax credit on $5000 maximum investment / year
 Some provinces offer an additional 15%
o New regulation stating that investors must hold on to the certificate for 8 years or they
have to return the tax credit back to the gov’t

Investment Objective Long-term growth

Type of Income Capital gains, dividends, and other income

Holdings Shares of small to mid-sized Canadian start-up companies

Client Suitability Investors seeking higher returns along with tax benefits

Risk Classification High

- Low liquidity and high risk companies

- Require high risk and long time horizon
95%

Real Property Funds

- Invest in real property

- Investors get a capital gain’s when properties are sold return plus interest from rental income
o Prices are set monthly or quarterly because they’re based on the appreciation of the
physical property

Investment Objective Long-term growth

Type of Income Capital gains, dividends, and other income

Holdings Residential, commercial or industrial properties, and in securities

from companies involved in real estate management or
development.

Client Suitability Investors who want exposure to the real estate sector. The investo
should have a high risk tolerance and be willing to invest for a long
period.

Risk Classification High

- High risk because they are invested in one business sector instead of anything diversified
o Less liquid – may not be able to convert to cash when you want

Commodity Pool Funds

81-102 – rules and regulations about what mutual funds can be sold

- Commodity pools use special derivatives and physical commodities beyond the scope of what is
typically allowed to be sold
o Governed by NI 81-104 –
o Objective is capital growth
 Might hold FUTURES or FORWARDS

Investment Objective Speculation

Type of Income Other income

Holdings Options contracts, commodity futures, and forward contracts

Client Suitability For sophisticated investors who are able to understand and accept
the high risk associated with commodity pools.
95%

Risk Classification High

INDEX FUNDS

- Seek to match the performance of index by buying derivatives or investing in them directly
o Composite index = TSX
o Bond index = DEX (Universe Federal Bond Index)
- They are considered to be passive investments because they don’t require any special analysis or
expertise from
- the portfolio manager

- Called “wraps” or managed portfolio solution

- Invests in a basket of mutual funds, from the same investment fund manager
o Diversified portfolio to meet specific objectives
- Objectives:
o Typically low to high risk “wraps” for investors who do not have the time or expertise to
diversify their own portfolio
o May provide income and capital gains or growth from the holding and accumulation of
stocks and bonds
 Less risky than stand alone mutual funds which invest solely in stocks and bonds
- Multiple portfolio managers to add expertise to the management of the portfolio
- Automatic rebalancing to adhere to target asset allocation mix
o If the value of equities goes to high they may rebalance to set it back to the original
allocation
- Fees
o Mgmt. of the fof
o Mgmt. of the underlying mutual funds in the f.o.f
95%

COMPETETIVE PRODUCTS

- There are thresholds or requirements for investors

- Such as the “accredited investor exemption
o Individual investors must meet financial thresholds to qualify
- Investment manager may restrict holding to 5% of client’s overall wealth

ETF’s

- Open end investment funds that hold a basket of securities

- Considered passive because they follow an index
o Traded through a broker or investment dealer during business hours
o PRICE CHANGE – relative to bid (buy) and ask (sell)
- Lower MER but you do pay commissions

Principal Protected Notes

- Debt instruments by creditworthy institutions

o Payment of original investment on maturity
o Performance linked to that of an underlying asset (instead of a coupon)
 Can participate in the upside of an underlying asset with no negative risk of
losing Principal as it is guaranteed at maturity


Pooled Funds

- Pool together investor monies

- Structured as unit trusts
- Portfolio managers make investment decisions – offer a variety of investment options

Difference

 they do not have to file prospectuses with the provincial securities commissions
 they are only available to accredited investors (i.e. sophisticated and high-net-worth
investors)
 they have high minimum investments requirements
 they benefit from economies of scale which lowers the management fees
95%

Hedge Funds

- privately distributed so they do not have a prospectus

o objective: generate positive returns in all market conditions
o broad investment mandates
- only available to accredited investors and requires a deposit minimum
- can invest in any type of security
o can use trading strategies such as leverage and short selling
- charge a performance fee in addition to a management fee for superior performance

Income Trusts

- invest in one or more operating companies with the goal of distributing cash flow to its
investors(unitholders)
o underlying company usually has a steady supply of rent, income, royalties, or
- units traded on the stock exchange

Segregated Funds – Individual Variable Insurance Contract (IVIC)

- life insurance industries equivalent to mutual funds

- variable annuities
o only sold through life insurance brokers
o value of the contract is linked to the value of the underlying asset

Unitholders do not own units of the fund, but instead own an insurance contract linked to the underlying
value of the fund the fund itself is owned by the insurance company which issues the contract

- Interest, dividends, capital gains and losses all follow through to the investor
- GUARANTEE 75% to 100% of principle
o At maturity (10 years or death of contract holder)
o Redemption at any other time is subject to market prices
- Some funds allow for the investor to reset the principal amount at different periodic intervals
o Resets lock in increases in the value of the segregated fund
 Charge higher management fees to cover the cost of the principal guarantee
 Can designate a beneficiary – investor money may be protected from creditors

- For investors that want some action in the equity market but the safety of protection of
principal
95%

UNIT 11 – MAKING RECOMMENDATIONS

Suitability

National Instrument 31-103: Registration Requirements, Exemptions, and Ongoing Registrant

Obligations (NI 31-103)

o Investment goals
o Time horizon
o Risk tolerance

Behavioural Finance

- A written service agreement

o Known as a client-planner engagement
 What services provided
 Over what period of time
 Costs
 Required documents
 Information protection procedure

Documentation

- Inquiries into material changes need to be made yearly

Researching Mutual Funds

Section Information Provided

Quick facts
What does the fund invest in?
How risky is it?
How has the fund performed?
Who is this fund for?
fund code, series start date, value of fund, MER, fund and portfolio manage
minimum investment required
top 10 holdings, investment mix by industry
an explanation of volatility, fund risk rating, statement that the fund is not
year-by-year returns for the past 10 years, best and worst 3-month returns
who should and should not invest in the fund
95%

A word about tax general statement advising of potential taxes payable in registered and non
Sales charge option (front-end or DSC), fund expenses (MER, trading costs,
How much does it cost?
commission), other fees (short-term trading fee, switch fee, change fee)
What if I change my mind? right to withdraw from agreement to purchase, right to cancel purchase, ri
For more information mutual fund company contact information, link to CSA “Understanding mu
- Quartile ratings and volatility provide some insight into how the fund has performed over other
Canadian equity funds with respect to risk and return
o MER – overall cost of the fund on an annual basis
o Manager start date – shows if returns are related to a manager that has a lot of
experience managing that fund
- Sharpe ratio – rate of return per unit of risk

Asset Allocation – to achieve a certain level of growth over a long time horizon

- Mixing investment assets among different types of securities

- Protection of capital, growth and diversification
o Diversify your assets and investments
1. Strategic allocation – Decide upon an asset allocation strategy and then periodically rebalance
the portfolio to match the original objective every 2 years
2. Tactical Asset Allocation – Periodically shift the proportion of different types of funds
(weighting) within an RRSP according to your assessment of investment opportunities (take
advantage of the market)
3. Life Cycle Investing – the amount of equities changes to fixed income instruments later in the
plan

Name Description Samp

this portfolio has a 100% weighting in equities with a goal of
Aggressive Growth 100% equities
maximizing return at an acceptable level of risk
this portfolio has a heavy weighting in equities with a smaller
Growth 70-90% equitie
percentage allocated to fixed income
this portfolio holds a significant portion of equity with a 50-60% equitie
Balanced
smaller percentage allocated to fixed income and cash income; 5-10%
this portfolio has a heavy weighting in fixed income with a 10-30% equitie
Conservative
smaller component in equities income; 10-20%
this portfolio is suitable for investors who wish to establish
Ultra Conservative 100% cash
an emergency fund or who want minimal exposure to risk
95%

Tax Efficiency – the most tax efficient mutual funds tend to be

 funds that invest heavily in equities,

 funds that use index investing,
 funds that use a buy-and-hold strategy, or
 corporate class structure funds.

Contributions Tax Investment Earnings

Account Type Withdraw
Deductible? Taxable Every Year?
Tax-free Savings Account (TFSA) No No Yes
Registered Education Savings Plan (RESP) No No EAP & investment inc
Withdrawals of subsc
free
Registered Retirement Savings Plan Yes No No
(RRSP)
Registered Retirement Income Fund No No No
(RRIF)
Registered Disability Savings Plan (RDSP) No No DAP & investment inc
Withdrawals of contr
free
UNIT 8 – MUTUAL FUND ADMINISTRATION

MUTUAL FUND CORPORATIONS MUTUAL FUND TRUST

Investors are referred to as shareholders. Investors are known as unitholders rather than

Trusts or trustees govern the fund. There is no

A board of directors governs the fund.
of directors.

The board of directors is elected by the shareholders at the Investors or unitholders typically do not have t
fund's annual general meeting. appoint the trustee(s)

Mutual Fund Hierarchy of Command

95%

- investment fund manager oversees the entire fund

o board of directors (corporation) – trustee (trust)
o could be a wholly owned subsidiary or group of people
o typically, the IFM looks at the objectives and selects a suitable portfolio manager
o annual management fee for their services
 name of the IFM is in the prospectus
- portfolio manager overseas a particular fund within the company
o purchasing and selling decisions for securities
o determine the asset mix
o receives a mgmt. fund from the funds they oversea
- custodian is the safekeeping of securities
o holding the income until it is time to be reinvested or distributed
- distributors are sales agents
- transfer agent – facilitate the purchase by sending units to the purchaser and money to the fund
- independent review committee – oversees the investment fund manager for conflicts of interest

Under National Instrument 81-102, a mutual fund custodian must be one of the following:
 a Canadian chartered bank
 a Canadian trust company with shareholder equity of not less than $10 million
 a Canadian chartered bank or Trust company affiliate with shareholder equity of not less
than $10 million, and incorporated under Federal or Provincial law

NI 81-107 requires all publicly offered mutual funds and investment funds to have an Independent
Review Committee.
95%

Calculating the NAVPU

Accurate market values for securities are obtained by doing the following:
 Recording the closing price of a security on the financial market where most of its
trading activity takes place.
 Setting reliable bid and ask quotations if a security is not traded, in accordance with the
stated policies of the fund.
 In the case of mortgages, setting a price that reflects the current rates for equivalent
mortgages.
o All costs are accrued and expensed in accordance with International Financial
Reporting Standards (IFRS)
o the auditor of the fund is required to confirm annually that proper valuation
techniques were employed.

NAVPU = (total assets - total liabilities) ÷ number of units outstanding

-
- settlement is the actual day the transaction clears
o T+3 - money is due on settlement
o T+1 for money market funds

PURCHASING MUTUAL FUNDS

Single Lump Sum Purchases – minimum typically are $500 - $150,000

Regular Investment Plans – regular investments as low as $25

Voluntary Accumulation – investor agrees to contribute a predetermined amount on a set basis

- The amount can be changed at any time

- The investor can withdraw from the plan at any time
o Known as a Pre-Authorized Chequing Plan

REDEMPTION

o The fund manager must provide to investors the requirements to redeem fund units.
- Good order
o Order received before the stipulated time in the prospectus
o Order placed by the rightful owner of the units/shares

1. Valuation Day
2. Receipt of the fund of purchase/redemption request
a. T+3 for settlement
95%

b. T+1 – money market funds

Systematic Withdrawal Plans

- Receive regular cash flow, tailored to needs

o Income keeps growing, tax deferred, and may be eligible for special tax treatment
- A fund must describe this in its prospectus as well as any minimum levels of holdings required
- Can pay as
o Ratio or % of holdings
o Fixed $ Amount

Ratio Withdrawal

- Amount paid is calculated as a daily percentage of the NAVPU, during previous payment period
- Or account value on the last day of the previous payment period
o Withdrawal ratio is flexible
 Good for the investor who has immediate cash but their income needs may
change

Fixed Dollar Withdrawal Plan – investors with financial commitments that are relatively stable may
choose this option

- Receive a fixed amount of the investment on specified intervals

 Dollar-cost averaging your withdrawals
o Price Falls – Units redeemed (more)
o Price Rise – Less Units Redeemed

Lump sum / Systematic Withdrawal – Taxation

- The entire amount is taxed in the year it was received

The prospectus must disclose -

 the average cost of units held
 the number of units redeemed during the year
 the total dollar value of payments made during the year

Withholding tax is required when withdrawing mutual funds

95%

- taxable portion of a mutual fund consists of Canadian dividends, foreign dividends,

interest income, and not realized gains
SWITCHING FUNDS

- A funds prospectus outlines whether there is a few for switching funds

o Usually there is a 2% fee for switching
o If there is a deferred sales charge, there is no charge for switching the fund
 Same for front end load
o However, some may have charges for early redemption or switches
 Usually within the first 90 days

MANAGEMENT FEES AND MUTUAL FUND FEES

1. Management fees and operating expenses, paid by the fund for professional portfolio
management, investment research, marketing, accounting, record keeping, and legal
advice
- NAVPU has management fees taken out already
2. Trailer fees, fees paid by the fund to mutual fund dealers
3. Loads or commissions, paid by investors when they buy and sell mutual funds
MER= costs of a fund as a % of it’s average Net Asset Value [MONEY MARKET FUND = 1%]
- % of each dollar going to management
- MER = (total expenses of fund before income tax) / (daily net asset value)
MER = total annual fund expenses per statement of operations ÷ average net asset value for the year x
100

Limitations of the MER

- Does not include:
o Commissions paid on purchase of units under front end sales charge
o Redemption fees when redeeming under deferred sales charge
o Fees payable directly by investor to dealer
95%

Short-Term Trading Fees

- To discourage short term trading of investments because they are intended to be medium to
long term investments (switching within 90 days)
o Fee is 1-3%

Front End Load

purchase price per share = NAVPU ÷ (1 - front-end sales charge)

Deferred Sales Charges – start at 6% and 7% and gradually fall over time

10% FREE REDEMPTION

Low Load Sales Charge – can withdraw up to 10% of their fund each year; based on market price

- Can be % of # of unit’s purchase

- Can be % of $ value of investment holdings

The amount redeemed can be used for a number of purposes, including:

 purchasing front-end load versions of the same mutual fund
 purchasing other mutual funds offered by the fund management company
 transferring the redemption value to other investments available with other companies

No Load Funds – No-load funds are generally sold by banks and trust companies, although some
independent mutual fund firms now offer no-load funds
 optional fees or charges for specific services
 redemption fees for funds that are not money market funds if redemption occurs within
90 days after purchasing the fund
 an account set-up or closing fee to cover the initial administrative costs of opening or
closing the account
95%

Fee Based Model – the dealer is compensated by means of overall fee paid directly by the client

- overall fee = annual % of assets under administration

- covers all services provided by the
- Mr. Jojo is a client of a mutual fund dealer and has a fee-based account. The dealer charges a
flat annual fee amounting to 1% of Mr. Jojo's assets. The dealer provides advice to Mr. Jojo and
purchases and redeems mutual fund units on his behalf. Mr. Jojo pays no commission to the
dealer on these transactions.

MUTUAL FUND DISCLOSURE

Funds Fact – must be delivered within 2 days of the trade

- Pertinent information about the fund, returns, suitability etc.

Simplified Prospectus – must be approved by Provincial securities regulator before a M.F is sold

- Contains all material facts: structure of fund, fees, compensations,

Annual Information Form – goes with Simplified Prospectus and Funds Fact document

- Investment restrictions
- Valuation methods
- Conflicts of interest

Management Reports of Fund Performance (MRFPs)

Mutual funds must also file annual and interim management reports of fund performance
(MRFPs). The MRFP contains a discussion and analysis of the fund's financial statements and
discloses transactions with related parties. It also contains a wealth of statistical data, including
the management expense ratio (MER) and the historical performance of the fund.

Mutual Funds are held in

- Client Name
o Client is the legal owner
- Nominee Name (street)
o Dealer is the legal owner
o LTA is not required
 Limited Trading Authority
95%

RESP – 50,000 lifetime maximum

- 20% of 2500 a year for CESG ($500)
o Will accumulate and roll over year after year to the maximum stated below
- For a maximum of $7200
o Or $1000 a year per beneficiary
- TWO TYPES
o Individual or family self-directed RESP’s
o Group or Scholarship plans

Availability - The CESG is available until the end of the calendar year in which the child turns 17,
as long as:
 the child is a Canadian resident
 an RESP has been opened in his or her name
 a request is made for the CESG

RDSP – maximum of $200,000 over life (Registered Disability Savings Plan)

- anyone can make contributions with written permission of the accountholder
- there are no refunds, no annual max
o can be made until Dec 31 the year they turn 59
RDSP Withdrawals – begin by the end of the year in which the beneficiary turns 60
- referred to as Disability Assistance Programs
o must report income from interest, bonds, dividends from dap

Additional CESG Benefit – for low income families

- received on the first $500 contribution made within the year

Additional CESG (A-CESG) 20% 10%

Adjusted Family Net Income $43,561 or less Between $43,561 and $87,123 M
Canada Learning Bond - for families that receive the National Child Benefit Supplement (NCBS)

- maximum amount to RESP from CLB Is $2000,

o $500 payable immediately + 100 a year until age 15
 CLB pays an extra 25$ within the first $500
 Beneficiary must be born after Dec 31, 2003

George and Maria are eligible for the National Child Benefit Supplement (NCBS). As a result,
they will receive an additional $525 from the Canada Learning Bond (CLB) program; $500
payable immediately plus an additional $25 to set up the RESP. In total, the couple is eligible to
receive additional money from all three federal programs - the CESG, the A-CESG, and the CLB.
During the year in which they open the RESP account for their daughter Alyssa, they are eligible
to receive $825, calculated as:
95%

 $200 from the CESG, calculated as $1,000 x 20%,

 $100 from the A-CESG, calculated as $500 x 20%, and
 $525 from the CLB.
In addition, they will continue to generate a $200 CESG for Alyssa on their annual RESP
contribution of $1000. Also,
depending on their adjusted family net income, they may be able to generate an additional
$200 of A-CESG and CLB towards Alyssa’s education savings.

Part two – beneficiary heads to post secondary…

RESP Withdrawals – called EAP Educational Assistance Payments

- If one does not attend post secondary, the money EXCEPT for the CLB, can be transferred to a
brother or sister’s RESP
- If transferring is not an option, the CLB, CESG, is returned to the government
o Investment income is paid as an Accumulated Income Payment and becomes taxable
income
 Can be open for 36 years

- If an individual over contributes to a TFSA in any month, a 1% penalty tax is payable in that
month on the highest balance recorded during that month. The 1% penalty tax will be applied
every month until the over contribution is withdrawn,

UNIT 2

REGISTRANT RESPONSIBILITIES

MFDA RULES

#1 – disclosure (prospectus)
#2 – ethical behaviour for dealing representatives (MF practise)
#N31 103 – registration regulations (relationship disclosure)
#4 – derivatives and options
#5 – rules governing the sale of mutual funds
#6 – independent review committee
#7 – last 5 years of MER on A.I.L
THE UDP – CCO – chief compliance officer

- Monitor the activities of the reps in the day to day business dealings
- Reps business dealings outside the firm
- Educational requirements
- Manage Reputational risks
95%

- Revie Trades
- Provide advice to reps

ACCOUNT Statements – every 3 months

CRM MODEL – relationship disclosure, client communications, client reporting

NAAF – proof that the relationship disclosure has been provided

- If relationship document is provided separately, evidence of delivery is required

Churning – the process of over actively trading a clients account

Questionable transactions –

Discretionary Trading – LAF – limited authorization form

- Allows dealer to trade on their behalf

Power of Attorney

- limited POA
o restriction on
- General POA

The Passport System – you can be registered to sell mutual funds in more than one jurisdiction, by
registering with only 1 regulator, the principal regulator

No Renewal Requirement
There is no registration renewal requirement for any province. Registration remains effective
until it is suspended or terminated, although annual fees continue to be payable for your
registration by your mutual fund dealer.
Re-activation – if you join a new firm within 90 days of leaving your old firm,

- The new firm must file an application to update your registration

Client Mobility Exemption

1. Your mutual fund dealer is registered in the new jurisdiction, known as the local jurisdiction.
2. You have no more than five clients in the local jurisdiction.

Before you act for a client in the local jurisdiction, you must disclose to your client that you are
exempt from registration in the local jurisdiction
and are not subject to requirements otherwise applicable under local securities legislation.
95%

Registrant Sponsor (employer) Permitted Products

Dealing Mutual Fund Dealer  Investment funds including mutual funds
Representative  Deposit products like GICs
 Principal protected notes (PPNs)
 Government of Canada, provincial and territorial go
bonds and strip bonds
 Bankers’ acceptances
 Commercial paper

*Dealing Exempt Market Dealer Prospectus-exempt securities that the individual's sponsor
Representative and is permitted to trade
*Registered IIROC Trading and investment advising in securities such as:
Representative  Stocks
 Fixed income products
 Mutual funds
 Derivative products

*Investment IIROC Trading in securities but does not provide investment advic
Representative  Stocks
 Fixed income products
 Mutual funds
 Derivative products

UNIT 3

SUITABILITY

Strategic Investment Process –

1) establish the client engagement

a) your duties
95%

b) your client’s duties

c) the services provided
d) the fees
2) gather client data and identify objectives
a) KYC
3) clarify client status, problems, and opportunities
a) clarify client status
b) identify any objectives that may impede goals
4) identify strategies and present the plan
a) based on natural assumptions of inflation, income tax rates, interest rates, anticipated
rates of return
5) implement the plan
6) monitor performance and update
KYC

MFDA Policy 2 – KYC minimum information standards

- if a client does not consent to the disclosure of information you must

o refuse the business
o notify the compliance department; ask for assistance
o in the event of a suspicious transaction or terrorist funding you must notify FINTRAC
- must contact the client once a year in writing to check for material facts
 Financial Circumstances
 Investment knowledge
 Risk tolerance
 Investment objectives

1. Capital preservation
2. Income
3. Growth of capital
4. Speculation, or aggressive growth of capital
5. Tax/Liquidity
 Time horizon
 Income
 Net worth

 Age
 Net Worth
 Annual Income
 Occupation

Unsuitable Trades
Refusing an Unsuitable Purchase Order
95%

If you receive instructions from a client to invest in products which in your view are not suitable,
you are required to provide cautionary advice that the investment is not suitable. You must also
document that:
 the transaction was unsolicited
 you performed a suitability review
 you gave the client cautionary advice
 you obtained authorization from the client to proceed with the transaction

IMPORTANT: Before you execute an unsuitable, unsolicited order for a client, you should clear
the transaction with your
Compliance Department or Branch Manager.

Leveraging

MFDA regulations require you to:

 Conduct a leveraging suitability assessment before recommending or
undertaking a leveraging strategy at a client’s request.
 Inform the client about the risks, and deliver the risk disclosure documents.
 Be aware of and fulfill your responsibilities as a dealing representative.

UNIT 4 – ECONOMIC FACTORS

AND FINANCIAL MARKETS

ECONOMIC FACTORS –

Nominal GDP – current market prices

Real GDP – adjusted for inflation; based on benchmark aka base year

Inflation Rate = (current year CPI value - previous year CPI value) ÷ previous year
CPI value x 100

Year CPI Annual Inflation Rate

Base Year 100
1 105 (105 - 100) ÷ 100 x 100 = 5.0%
2 110 (110 - 105) ÷ 105 x 100 = 4.8%
3 115 (115 - 110) ÷ 110 x 100 = 4.6%
95%

Distribution Effect of inflation - distribution of real income from lenders to borrowers

- Lenders receive less income and borrowers benefit from a loer

Labour force includes Not included in labour force

- Employed - Retired persons
- Full time - Students
- Part time - Unpaid family workers
- Unemployed (actively looking for work) - Others not looking for work

FISCAL POLICY

- Reduced taxes or increased transfer payments

o EXPANSIONARY POLICY
 Stimulate growth, bring interest rates down
- Increased taxes
- Reduced spending
- Reduced transfer payments
o CONTRACTIONARY POLICY
 Slow the economy, bring interest rates up

MONETARY POLICY

The duties of the Bank of Canada are to:

 regulate currency and credit in the best interests of the economy, overnight rate
for lending to other commercial banks
 control and protect the Canadian dollar
 control inflation and interest rates

To fulfill these duties, the Bank of Canada may do one or more of the following:
 increase (redeposit) or decrease (drawdown) the Government of Canada's
deposits with the chartered banks
 participate in open market operations by buying or selling treasury bills through
a designated group of investment dealers and banks
 change the bank rate to signal its intentions regarding monetary policy

Financial Markets
Supply
The supply of capital in the Canadian financial markets comes from the following sources:
 household savings
 retained earnings that corporations have not paid out as dividends
95%

 budget surpluses in the government sector

 savings from abroad

Demand
The demand for investment capital comes from the spending decisions of the following:
 governments (federal, provincial, municipal)
 corporations
 Canadian households
 foreigners interested in the Canadian financial markets

Financial markets serve borrowers and lenders in three ways:

- channeling funds from lenders to borrowers
- facilitating the timing of purchases
- providing a mechanism for government policy
MONEY MARKETS

Capital Markets

- Trading place for financial assets

o Stocks, bonds, derivatives
o Long term market

Money Markets

- Short term financial assets that appreciate in 1 year or less

Foreign Exchange Markets

- Bank of Canada buys and sells currency in order to regulate the dollar

The Underwriting Process

- Underwriting is the process by which investment bankers raise investment capital from
investors on behalf of corporations and governments that are issuing securities.

Benefits of Stock Exchange

Some of the benefits a company enjoys by listing on an exchange include:

 increased marketability of shares due to greater market exposure
 increased public confidence in the company due to the exchange's disclosure rules
 an active secondary market that can broaden a company's shareholder base

OTC MARKETS
95%

 unwillingness to abide by the disclosure rules of an exchange

 low volume of trading in its shares
 low investor interest
 inability to meet the requirements to be listed, usually because it is a small company

Securities firms
A securities firm is any company that specializes in the trading of securities by performing one
or more of the following functions:
 underwriting new issues and secondary distributions
 stock brokerage
 market research and the provision of investment advice
 portfolio management

Dealers - purchases the securities from the issuing company or the selling investor at a fixed price, and
attempts to sell them in the market at a profit. This is called a bought deal

Brokers - securities firm will agree to sell new issues only to the best of its abilities, meaning that it will
try to sell as many shares as possible at a stated price, but it does not accept any responsibility if all the
shares are not sold. This is called a best effort deal. In this case, the securities firm is acting as a
securities broker or an agent on behalf of the issuer

UNIT 7

PORTFOLIO MANAGEMENT

Portfolio Managers – ensures that the investment objectives are met

- most recent investment decisions can be found on the MRFP (Management Report and Fund
Performance)
- must have CFA
95%

Technical Analysis
- Technical analysis is a method of evaluating securities based on studying past trends in
market activity, prices, and volume. Technical analysts look for patterns or indicators to
predict future price movements. Technical analysts are often referred to as chartists
since they rely heavily on charts of share-price behaviour and trading volume to make
their extrapolations. Below is a sample chart.
Fundamental Analysis
- Fundamental analysis involves looking at the fundamentals of a company such as
revenues, assets, profits, and competitive position.
Modern Portfolio Theory

Modern portfolio theory explains the benefits of taking a portfolio approach to investments rather than
focusing on single investments. Accordingly, investments should not be evaluated only on their own
characteristics, but also in relation to other types of investments.

Efficient Frontier

..

Cash Flow Statement

Section Description
Refers to cash inflows and outflows from the company’s daily activities, such as the
operating activities
sale of its products and services.

Includes cash expenditures for the purchase of assets or cash receipts through the
investing activities
as income from investments, such as interest or dividends.
95%

Includes cash raised by borrowing money or the issuance of shares and amounts r
financing activities
and debt-holders.

Gross Profit Margin = (revenue - cost of goods sold) ÷ revenue

Current Ratio = current assets ÷ current liabilities

Debt-equity Ratio = (total outstanding short-term and long-term debt)

÷ shareholders' equity at book value
P/E Ratio = (market price per share) ÷ (earnings per share)

MUTUAL FUND STANDARD PERFORMANCE

• the performance of the financial markets in which the mutual fund invests
• the investment skill of the portfolio manager
• the flow of cash in and out of the mutual fund as a result of net sales and net redemptions
For non-money market funds, standard performance data is calculated using the formula for annual
compounded rate of return.

Total Return = [(redeemable value ÷ initial value) (1 ÷ n)

- 1] x 100

Measures of Investment Risks

Standard Deviation

- The difference in the average historical return

o Closer to average historical return = lower standard deviation

Beta

Investment Beta Volatility Level Investment Perform

Less than one Lower volatility than the market Lower risk and return than the marke

Equal to one Volatility level similar to the market Return and risk similar to the market
Potential for higher return with highe
Greater than one Higher volatility than the market
market
-

UNIT 10 - TAXATION

- Federal tax goes to

o CPP, EI
- Provincial Tax
o Workers Compensation
95%

average tax rate = (tax payable ÷ taxable income) x 100

Alberta has a flat tax of 10%

added to everythin

Tax Deduction – taxable income

Tax Credit – Taxes payable

Transferable Tax Credits Tax Credits Eligible for Carry Forward

- Tuition, education and textbook amount - Medical expenses amount
- Pension income amount - Tuition, education and textbook amount
- Age amount - Charitable contribution amount
- Disability amount

Federal Dividend Tax Credit (After 2013)

Eligible Dividend Non-Eligible Dividend
Gross-up 38% 18%
Dividend tax credit as % of grossed-up dividend 15.02% 11%

Foreign Income – subject to withholding tax in the country of origin

Flow Through - Only Canadian dividends and capital gains can be flowed through to mutual fund
corporation unitholders.

- Income goes on a T5 (mutual fund) investment income

- T3 – trust income

Capital Yields – convert interest into capital gains to make it tax preferred

Capital Dividends
95%

Nikos paid $1000 to purchase 100 units of High Peaks Fund at a price of $10.00 per unit. At the
end of the year, the fund paid a distribution of $0.60 per unit for a total amount of $60,
calculated as ($0.60 x 100). The distribution per unit consisted of $0.24 in dividends from
taxable Canadian corporations, $0.30 as interest income, and $0.06 as a return of capital. The
return of capital reduced the cost of Nikos' fund by $0.06 per unit, to $9.94. When the fund is
sold, the lower cost base would increase the amount of the capital gain by $0.06 per unit.

UNIT 9

RETIREMENT

After age 18…. OAS Pension Benefit

…lived in Canada for 40 years or more Yes, eligible for full OAS pension benefit
…lived in Canada for less than 40 years, but more than 10 years Yes, eligible for partial OAS pension benefit
(20 years for a non-resident)

…lived in Canada for less than 10 years (20 years for a non-resident) No benefit

OAS Benefit 0.6 – INCREASE for deferral

CPP Benefit 0.5 – DECREASE for early

OAS – reduced by 0.15 for every dollar over 70,954

GIS – reduced by $2 for every $1 earned

The allowance stops being paid when the combined yearly income of the individual and his or
her spouse, excluding OAS pension benefits, reaches $30,864. At age 65, the allowance is
replaced by OAS pension and GIS benefits.

Allowance for Survivor

Currently, the maximum allowance for survivor is $1169.14 per month, tax-free. The allowance stops
being paid when your yearly income reaches $22,464. At age 65, the allowance for survivor is replaced
by OAS pension and GIS benefits.

CPP Provides the following benefits

 retirement benefits
 survivor benefits
 disability benefits
 death benefits
- Contributions are calculated based on a percentage of a person’s annual earnings between a
minimum, known as the year's basic exemption, or YBE;
95%

- a maximum, known as the year's maximum pensionable earnings, or YMPE

- For the CPP, the contribution rates are 4.95% for both the employee and employer portions of
the contribution.
- For the QPP, the contribution rates are 5.1% for both the employee and employer portions of the
contribution.

CPP Disability

- Ends at 65 and turns automatically into an RRSP

DEFINED BENEFIT PENSION PLAN

- The benefit is known and guaranteed

o Can be based on average pensionable earnings
- Based on their earnings throughout their career with the employer
• their earnings over their final years with the employer, usually 3 or 5 years
• their best earning years with the employer, usually 3 or 5 years

average pensionable earnings x accrual rate x years of service