Section 4 Quiz

12/15/23, 10:24 AM Section Quiz
Check: Section 4 Quiz

Reports
Overall Results
Score: Number
Attempt Questions Correct Your Score
75%
1 40 16 40%
2 40 5 13%
3 40 0 0%
4 40 30 75%
You have passed the test.
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Chapter Results
Score: Number
Chapter Questions Correct Your Score
75% Chapter 10 – The Modern
Mutual Fund 10 10 100%
Chapter 11 – Conservative
Mutual Fund Products 10 10 100%
Chapter 12 – Riskier
Mutual Fund Products 10 10 100%
Chapter 13 – Alternative
Managed Products 10 0 0%
Question Results
1. Identify who is responsible for the taxes on dividend income distributed to mutual fund unitholders from a mutual fund trust.
Good choice! A. Unitholders.

B. Fund manager.
C. Mutual fund.
D. Trustee.
Feedback: The most common structure for mutual funds in Canada is the open-end trust. The trust structure allows a fund itself to avoid
taxation. Any interest, dividends and capital gains income, net of the fund’s fees, expenses and capital losses, if passed to its unitholders
each calendar year, will allow the trust to avoid being taxed on its income. As a matter of course, all mutual fund trusts take advantage of this
ability to avoid income taxes. Any income that has flowed through to the unitholder is taxed in the hands of the unitholder.
Reference | Chapter 10 – The Modern Mutual Fund
2. Select the entity that is ultimately responsible for the activities of a mutual fund trust.
A. Unitholders.
Good choice! B. Trustee.
C. Board of Directors.
D. Fund Managers.
Feedback: The board of directors of a mutual fund corporation, and the trustee(s) of a mutual fund trust, have the ultimate responsibility for
the fund’s activities.
3. Identify the organization responsible for maintaining records of the owners of mutual fund units and shares.
Good choice! A. Registrar.

B. Dealer.
C. Trustee.
D. Fund Manager.
Feedback: Sometimes the custodian also serves as the fund’s registrar and transfer agent, maintaining records of who owns the fund’s
units/shares.
4. Identify the organization responsible for regulating mutual funds in Canada.
A. Federal Government.
B. IIROC.
C. MFDA.
Good choice! D. Provincial securities commission.
Feedback: The Mutual Fund Dealers Association (MFDA) is the mutual fund industry’s SRO for the distribution side of the mutual fund
industry. It does not regulate the funds themselves. That responsibility remains with the provincial securities commissions, but the MFDA
does regulate how the funds are sold.
5. Identify how an open-end trust may avoid taxation on dividend income.
A. Declaration that dividends are equal to net income.

B. Dividend tax credit.
C. Registering tax-shelter status.
Good choice! D. Pass dividends to unitholders.
Feedback: The most common structure for mutual funds in Canada is the open-end trust. The trust structure allows a fund itself to avoid
taxation. Any interest, dividends and capital gains income, net of the fund’s fees, expenses and capital losses, if passed to its unitholders
each calendar year, will allow the trust to avoid being taxed on its income. As a matter of course, all mutual fund trusts take advantage of this
ability to avoid income taxes. Any income that has flowed through to the unitholder is taxed in the hands of the unitholder. The rate of income
tax depends on the type of income that the fund generated (i.e., interest, dividends, capital gains) and the type of account (e.g., RRSP) the
client holds the mutual fund in.
6. Identify who has the ultimate responsibility for calculation of a fund’s Net Asset Value Per Share (NAVPS).
A. Custodian.
Good choice! B. Fund manager.
C. Distributor.
D. Registrar.
Feedback: Other responsibilities of a fund manager, which it can attend to itself or outsource, include calculation of the fund’s net asset
value, preparation of the fund’s simplified prospectus, annual information form and other required reports, income tax reporting, shareholder
or unitholder record-keeping and reporting, and providing instructions to the custodian for the release of the fund’s cash or securities to settle
the fund’s purchases and sales of securities.
7. Identify the document in which the principal investment objectives and policies of a mutual fund trust are set out.
A. Prospectus.
Good choice! B. Declaration of trust.
C. Statement of Investment Policy.
D. Annual Information Fund.
Feedback: The declaration of trust, trust deed (or similar document) establishing the mutual fund trust sets out:
the fund’s principal investment objectives
its investment policy
any restrictions on the fund’s investments
who the fund’s trustee, manager and custodian will be (or simply names the trustee and gives the trustee the power to appoint a manager
and a custodian)
how many classes or series of units the fund will or may have. Different classes and series having different characteristics are established
to make them more attractive to different types of purchasers (i.e., general public, pension funds, institutional investors)
8. Scott’s client has asked for a recommendation for an investment strategy. The client regularly receives small amounts of dividends from her
mutual fund that she does not need as current income. Recommend a strategy that Scott’s client could use.
Good choice! A. Reinvestment of dividends into new shares.

B. Switch to a mutual fund corporation.
C. Pre-authorized contribution plan.
D. Inter-fund transfer.
Feedback: Mutual funds consist of not only an underlying portfolio of securities, but also a package of customer services. Most mutual funds
offer the opportunity to compound an investment through the reinvestment of dividends.
9. A mutual fund corporation has income of $150,000 before fees and expenses, and $110,000 after fees and expenses. Calculate the amount
that the corporation should declare as dividends to mimic the flow through status that a mutual fund trust would enjoy in this situation.
A. $75,000
B. $150,000
C. $40,000
Good choice! D. $110,000
Feedback: Mutual funds may also be set up as federal or provincial corporations. Provided they meet certain conditions set out in the
Income Tax Act, mutual fund corporations are eligible for a special tax treatment if the corporation’s holdings consist mainly of a diversified
portfolio of securities. The income that the mutual fund corporation earns must be derived primarily from interest and dividends received from
these securities and any capital gains realized from the sale of these securities. Investors in mutual fund corporations receive shares in the
fund instead of the units that are received by investors in mutual fund trusts. Mutual funds corporations lack the flow through status of mutual
fund trusts. However, mutual fund corporations can achieve a similar result by declaring dividends during the course of the year that are
equivalent to the corporation’s net income after fees and expenses. These dividends are then taxed in the hands of the fund’s shareholders.
10.An investor can cancel a mutual fund purchase within which of the following periods?
Good choice! A. Within 48 hours after receiving confirmation of the purchase.

B. Within five business days following the purchase.
C. Within three business days after receiving the purchase confirmation.
D. Within one week of receiving the fund facts document.
Feedback: Investors have certain statutory rights of withdrawal and rescission. Securities legislation in some provinces gives investors the
right to withdraw from an agreement to buy mutual funds within two business days of receiving the confirmation of purchase.
11. The value of money market securities should still fluctuate with changing interest rates, but the fluctuation should be relatively small. Select
the reason behind the rationale from the following options.
A. Money Market funds are CDIC insured.

Good choice! B. Money market funds are short-term investments.
C. Money market funds are long-term investments.
D. Most of the money market net assets are investment in equity securities.
Feedback: The value of money market securities should still fluctuate with changing interest rates, but the fluctuation should be relatively
small, because their maturity is very short.
Reference | Chapter 11 – Conservative Mutual Fund Products
12.According to National Instrument 81-102, what would be an acceptable average term to maturity for ABC Money Market Fund?
A. 91 days.
B. 120 days.
C. 180 days.
Good choice! D. 60 days.
Feedback: The investment objective of a money market fund is to earn stable returns by investing in short-term money market securities.
These securities include Government of Canada T-bills, T-bills of other provinces, very-short-term government securities other than T-bills,
and high-quality corporate securities such as commercial paper and bankers’ acceptances. As required by National Instrument 81-102, the
term to maturity of these securities is less than one year, and the average term to maturity of a money market fund must be 90 days or less.
13.How often do money market funds distribute the earned income?
Good choice! A. Monthly.

B. Semi-annually.
C. Quarterly.
D. Annually.
Feedback: In general, money market funds distribute the earned interest income on a monthly basis.
14.Describe how the effective yield calculation treats the 7-days return?
Good choice! A. It assumes that the returns earned weekly are re-invested in the fund.
B. It assumes that the returns will be distributed weekly by the fund.
C. It assumes that the investor will redeem the fund units that are equal to the weekly return as
needed.
D. It assumes that the fund manager will deduct a 2% management fee from the weekly return.
Feedback: The effective yield calculation, in contrast, makes the assumption that the yield generated over the last seven days will remain
constant for one year into the future, and that the returns earned weekly are re-invested in the fund. Thus, weekly compounding of returns at
the current rate is assumed in the effective yield calculation.
15.Select the correct statement about risk associated with conservative mutual funds.
Good choice! A. Bond funds are considered to carry higher risk than mortgage funds.
B. Bond funds are considered to carry lower risk than money market funds.
C. Mortgage mutual funds are considered to carry lower risk than money market funds.
D. Mortgage mutual funds are considered to carry higher risk than bond funds.
Feedback: Mortgage mutual funds are considered to carry higher risk than money market funds but less risk than bond funds.
16.What type of risk is primarily associated with mortgage funds?
A. Reputational risk.
B. Liquidity risk.
C. Purchasing power risk.
Good choice! D. Default risk.
Feedback: The assets that mortgage funds hold have higher default risk. This is because mortgage funds are backed by the
creditworthiness of individuals rather the creditworthiness of a government, as in the case of T-bills.
17.When are residential mortgages considered as conventional mortgages?
A. When they do not exceed 95% of the appraised value of the property.
Good choice! B. When they do not exceed 80% of the appraised value of the property.
C. When they do not exceed 90% of the appraised value of the property.
D. When they do not exceed 85% of the appraised value of the property.
Feedback: Residential mortgages are conventional mortgages if they do not exceed 80% of the appraised value of the property.
18.Which of the following is unlikely to be found in a money market fund?
Good choice! A. Government of Canada bonds maturing in 10 years.

B. Government of Canada Treasury Bills.
C. 10-year provincial government bond maturing in one year.
D. Provincial Treasury Bills.
Feedback: Money market funds are essentially a portfolio of money-market securities. As a result, they invest in securities considered to be
part of the money market, which would be securities with 'short-term' maturities, meaning that a Government of Canada bond with a maturity
10 years into the future would not be considered appropriate for investment. The provincial government bond that was originally issued with a
maturity of 10 years, but is now maturing in one year, and this would be classified as a 'short-term' bond and thus part of the money-market.
19.Consider a money-market fund with $5 million of net assets that, after seven days, had assets of $5,003,250. What is the fund’s current
yield?
A. 5.47%.
B. 7%.
Good choice! C. 3.39%.
D. 6.50%.
Feedback: Calculations: [$5,003,250 / $5,000,000] – 1 = 0.00065. Next, 0.00065 x 365 / 7 = 0.033892 or 3.39%.
20.If a bond fund manager feels that interest rates will rise, what action will she likely take?
A. Recommend that the fund holders sell their units before interest rates rise.
B. Revise the portfolio and increase portfolio duration.
C. Sell all the bonds in the portfolio and buy them back after the rates have risen.
Good choice! D. Revise the portfolio and reduce portfolio duration.
Feedback: Duration is sometimes referred to as a bond’s time-weighted maturity. If portfolio managers believe rates will rise, they will
shorten the duration of the portfolio to make it less sensitive to interest rate changes. By shortening the portfolio’s duration, they will protect
the portfolio from a decline in value to a certain extent as rates rise.
21.What is the primary investment objective of an equity growth fund?
A. Diversification.
Good choice! B. Capital gains.
C. Dividend income.
D. Interest income.
Feedback: The investment objective of an equity growth fund is capital gains. Some dividend income may be earned, but probably not
much. Equity growth funds seek out smaller firms that do not have the financial ability to pay dividends.
Reference | Chapter 12 – Riskier Mutual Fund Products
22.What type of mutual fund is best approximated by an ETF?
A. Standard equity fund.

B. Aggressive equity growth fund.
Good choice! C. Equity index fund.
D. Conservative equity growth fund.
Feedback: An alternative to index funds are exchange-traded funds (ETFs). These are discussed in greater detail in Chapter 13. In Canada,
ETFs are traded on the Toronto Stock Exchange and are bought and sold through appropriately licensed investment advisors or discount
brokers.
23.With regards to derivatives, what is the main difference between a hedger and a speculator?
A. A speculator invests only in equity derivatives and a hedger invests only in fixed income derivatives.
B. A hedger uses derivatives as a bet on future movements of the market and a speculator uses
derivatives as insurance.
Good choice! C. A speculator taking a bet on future movements of the market and a hedger uses derivatives as
insurance.
D. A hedger invests only in equity derivatives and a speculator invests only in fixed income derivatives.
Feedback: The difference between a hedger and a speculator is that a hedger uses derivatives as a kind of insurance policy against the
decline of the portfolio. A speculator is simply taking a bet on the future movement of the market. Most mutual funds do not permit their
managers to take speculative positions in derivatives, but they do permit them to hedge the value of the portfolio by using them. What a
manager is permitted to do is specified in the fund’s simplified prospectus.
24.What class of fund has the objective of earning both current income and capital gains while at the same time preserving capital?
A. Aggressive equity growth fund.

B. Money market funds.
Good choice! C. Balanced funds.
D. Conservative equity growth fund.
Feedback: Balanced mutual funds invest a percentage of their assets in fixed-income securities and a percentage in equities. They are often
referred to as “hybrid” products, because they are part fixed-income fund and part equity fund. Balanced mutual funds have the objective of
earning some amount of both current income and capital gains while at the same time preserving capital.
25.What balanced fund is consistent with a defensive position in relation to equity markets?
A. A fund with 75% aggressive equity growth holdings and 25% conservative equity growth holdings.
Good choice! B. A fund with 20% aggressive equity growth holdings and 80% fixed income.
C. A fund with 80% aggressive equity growth holdings and 20% fixed income.
D. A fund with 70% aggressive equity growth holdings and 30% conservative equity growth holdings.
Feedback: The distinguishing feature of balanced mutual funds is the way they go about meeting their investment objectives. Portfolio
managers frequently attempt to shift the proportions of investments in fixed-income and equity securities in keeping with changing market
conditions.
When interest rates have peaked, managers want to be in fixed-income securities.
When the stock market is set for an increase, they want to be in stocks.
When both bond and stock markets are volatile, they will hold large amounts of money market securities.
In other words, balanced mutual fund managers attempt to time the market to get the best returns depending on market conditions.
26.When is a balanced fund most likely to hold large amounts of stocks?
A. When interest rates have peaked.

B. When corporate profits are weak.
C. When both stock and bond markets are volatile.
Good choice! D. When the equity market is set for an increase.
Feedback: The distinguishing feature of balanced mutual funds is the way they go about meeting their investment objectives. Portfolio
managers frequently attempt to shift the proportions of investments in fixed-income and equity securities in keeping with changing market
conditions.
When interest rates have peaked, managers want to be in fixed-income securities.
When the stock market is set for an increase, they want to be in stocks.
When both bond and stock markets are volatile, they will hold large amounts of money market securities. In other words, balanced mutual
fund managers attempt to time the market to get the best returns depending on market conditions.
27.What is the assumption that target dates are structured on?
A. A less defensive position is needed as the target date approaches.

B. More aggressive growth stocks are needed as the target date approaches.
C. Risk tolerance increases as the target date approaches.
Good choice! D. Risk tolerance declines as investors grow older.
Feedback: The glide path refers to changes in the fund’s asset allocation mix over time which allows the fund to pursue a growth strategy by
holding more risky assets in the early years of the fund’s life and then gradually reduce the risk of the fund as the target date approaches.
The adjustment is made automatically by the fund manager without any action from fund holder. Target-date funds are structured on the
assumption that risk tolerance declines as investors grow older.
28.Where is a target date fund most likely to be reclassified upon its maturity date?
A. Aggressive growth fund.

Good choice! B. Fixed income and balanced funds.
C. Conservative growth fund.
D. Standard equity fund.
Feedback: These funds have their own category under the CIFSC classification. Upon maturity, target-date funds are moved out of the
target-date group and included in the appropriate fixed income or balanced fund category.
29.What is true of foreign-source dividends?
A. They are taxed at the same rate as Canadian dividend income.

B. They are taxed at lower rate than Canadian dividend income.
C. They are taxed at a lower rate than Canadian capital gain income.
Good choice! D. They are taxed at the same rate as Canadian interest income.
Feedback: Global equity funds earn two types of return: dividends and capital gains. Capital gains are probably more significant. Dividends
from global funds do not come from Canadian corporations and therefore are not eligible for the dividend tax credit. As a result, foreign-
source dividends are taxed at the same rate as interest income.
30.A client owns units of a pool of mutual funds. What type of fund is the client likely invested in?
A. Target date fund.

Good choice! B. Fund of funds.
C. Specialty mutual fund.
D. Portfolio allocation service.
Feedback: Fund wraps can be funds of funds or portfolio allocation services. With a fund of funds, the client owns units of a pool of mutual
funds, while in a portfolio allocation service, the client owns units of several mutual funds in the proportions established through the allocation
service. Thus, in a portfolio allocation service, the investor actually owns units of the constituent mutual funds rather than units of a fund
holding other funds.
31.The performance of a Principal Protected Note (PPN) may not exactly track the performance of the underlying asset. Identify this type of
risk.
A. Credit.
B. Currency.
C. Performance.
D. Liquidity.
Feedback: Performance Risk: The performance of a PPN may not exactly track the performance of the underlying asset. It can either
underperform or outperform it. The mismatch in performance is likely in the early years of the PPN issue. Investors are not just purchasing an
underlying asset’s returns with a principal protection feature tacked on, because many factors are involved in pricing a PPN, including
interest rates, fees, the actual performance of the underlying asset, whether leverage has been used, and various explicit and implicit fees.
Reference | Chapter 13 – Alternative Managed Products
32.A hedge fund manager purchases shares of ABC Energy Ltd. because she expects their shares will rise in value after it takes over control of
XYZ Energy Consolidated. Determine the strategy the manager has used.
A. Event-driven.
B. Relative value.
C. Directional.
D. Incentive-driven.
Feedback: Event-driven strategies seek to profit from unique events such as mergers, acquisitions, stock splits and stock buybacks. Hedge
funds that use event-driven strategies have medium exposure to the underlying market direction.
33.Select the relationship between the trading price of a closed-end fund trade with respect to their net asset value.
A. They trade above their NAV.

B. They trade below their NAV.
C. They may trade above or below their NAV.
D. They trade at their NAV.
Feedback: Closed-end funds have risks relating mainly to trading, liquidity, and leverage. They do not necessarily trade at their net asset
value. In an open-ended fund, the fund NAV is the sum of the value of the constituent securities, but in a closed-end fund, there is often a
discount to the NAV. This discount may become especially significant in volatile markets, negatively affecting investors who want to sell their
shares. In bear markets, closed-end fund shareholders may suffer as the value of the underlying assets declines and as the gap between the
discount and the net asset value widens.
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34.Identify the type of sales fee that is charged on an Exchange Traded Fund (ETF).
A. A front-end load.
B. A management fee.
C. A broker’s commission.
D. A back-end load.
Feedback: Rather than paying a front-end or back-end load as is the case with some mutual funds, the cost to purchase an ETF is the
commission charged by a broker or discount broker when both buying and selling the ETF units.
35.Select the usual minimum holding period required for an investor in a segregated fund to qualify for guarantees.
A. 2 years.
B. 7 years.
C. 10 years.
D. 5 years.
Feedback: Segregated funds, like mutual funds, can be bought or sold at any time. However, to qualify for the guarantee investors must hold
the fund for a minimum period, usually ten years.
36.Select the segregated fund term that refers to the person who purchased the contract.
A. Trustee.
B. Contract holder.
C. Annuitant.
D. Beneficiary.
Feedback: Essentially, a segregated fund contract covers the following three parties:
The contract holder—the person who purchased the contract.
The annuitant—the person on whose life the insurance benefits are based.
The beneficiary—the person who will receive the benefits payable under the contract upon death of the annuitant (a contract may have
more than one beneficiary).
37.Identify the minimum maturity guarantee permitted on a segregated fund contract under provincial legislation.
A. 75%
B. 50%
C. 100%
D. 90%
Feedback: Maturity guarantees. One of the key features associated with segregated funds is the maturity guarantee, which is the promise
that the beneficiary will receive at least a partial guarantee of the return of the money invested. Provincial legislation requires that the
guarantee be at least 75% over a contract term of at least a 10-year holding period. Many insurers have increased the minimum statutory
75% guarantee to 100%.
38.Jovan invested $200,000 in a segregated fund that includes a 100% maturity guarantee. The market value of the fund at maturity is
$215,000. Determine the value of the maturity guarantee.
A. $215,000
B. $200,000
C. Zero
D. $15,000
Feedback: Maturity guarantees. One of the key features associated with segregated funds is the maturity guarantee, which is the promise
that the beneficiary will receive at least a partial guarantee of the return of the money invested. Provincial legislation requires that the
guarantee be at least 75% over a contract term of at least a 10-year holding period. Many insurers have increased the minimum statutory
75% guarantee to 100%.
Example: Leslie has invested in a segregated fund over the past ten years that includes a 100% maturity guarantee. Assume that the amount
invested was $100,000. The market value of the fund at maturity is $95,000. Since the market value of the fund is less than the amount
invested, Leslie is paid a $5,000 maturity guarantee. In this scenario, the value of the fund at maturity is $215,000, meaning that it is higher
than the original investment. As a result, the maturity guarantee is not required and has zero value.
39.Calculate the minimum annual withdrawal amount for a 7% Guaranteed Minimum Withdrawal Benefit (GMWB) plan purchased for $200,000
with a current market value of $150,000.
A. $7,500
B. $150,000
C. $14,000
D. $200,000
Feedback: With a GMWB:

The client purchases the plan, and the GMWB option gives the planholder the right to withdraw a certain fixed percentage (7% is typical)
of the initial deposit every year until the entire principal is returned, no matter how the fund performs.
40.Select a factor that results in management expenses for portfolio funds being higher than for individual segregated funds.
A. The investor pays for the asset allocation service.

B. The tax rate of the funds is higher.
C. The investor pays higher distribution fees.
D. The fund’s turnover rate is higher.
Feedback: Management expenses for portfolio funds are generally higher than for stand-alone segregated funds and guaranteed investment
funds, because the investor pays for the asset allocation service, on top of the management costs for the underlying funds.

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12/15/23, 10:24 AM Section Quiz

Check: Section 4 Quiz

You have passed the test.

Good choice! A. Unitholders.

Good choice! A. Registrar.

4. Identify the organization responsible for regulating mutual funds in Canada.

A. Declaration that dividends are equal to net income.

Good choice! A. Reinvestment of dividends into new shares.

Good choice! A. Within 48 hours after receiving confirmation of the purchase.

A. Money Market funds are CDIC insured.

Good choice! A. Monthly.

16.What type of risk is primarily associated with mortgage funds?

17.When are residential mortgages considered as conventional mortgages?

Good choice! A. Government of Canada bonds maturing in 10 years.

21.What is the primary investment objective of an equity growth fund?

A. Standard equity fund.

A. Aggressive equity growth fund.

A. When interest rates have peaked.

27.What is the assumption that target dates are structured on?

A. A less defensive position is needed as the target date approaches.

A. Aggressive growth fund.

29.What is true of foreign-source dividends?

A. They are taxed at the same rate as Canadian dividend income.

A. Target date fund.

A. They trade above their NAV.

Feedback: With a GMWB:

A. The investor pays for the asset allocation service.

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