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CISI Investment Funds in Canada (IFC) Exam Sample Questions (Q17-Q22):
NEW QUESTION # 17
Danny is a Dealing Representative for Everbright Investments. He met with his client Adele, who has
$1,000,000 to invest. During their meeting Danny determines that Adele has a high-risk profile. In addition, he learns that she has an excellent understanding of equities and how volatile they can be. Danny is considering recommending growth funds specifically, and making a recommendation from the following investment options:
Based on the information provided, which mutual fund should Danny recommend?
Answer: D
Explanation:
Adele has a high-risk profile and an excellent understanding of equities. Therefore, it would be appropriate for Danny to recommend growth funds. However, since Adele has $1,000,000 to invest, it would be prudent to diversify her investments and invest equally in all 3 funds. This way, she can benefit from the exposure to different regions and sectors, and reduce the impact of market fluctuations on her portfolio. Based on the table, all 3 funds have the same 5-year annualized returns net of MER, which is 15%. However, they have different MERs and Sharpe ratios. The MER is the fee charged by the fund manager for managing the fund, and the Sharpe ratio is a measure of risk-adjusted return. A lower MER means a lower cost for the investor, and a higher Sharpe ratio means a higher return per unit of risk. Therefore, investing equally in all 3 funds would allow Adele to achieve a balanced trade-off between cost and performance. References:
* Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.2: Types of Mutual Funds, page 4-6
* Canadian Investment Funds Course (CIFC) Study Guide, Chapter 5: Fixed-Income Securities, Section
5.5: Risk-Return Trade-Offs, page 5-14
* Sharpe Ratio Definition - Investopedia
NEW QUESTION # 18
Recently interest rates have gone up. Your customer, Mr. Corelli, has asked you how this will affect the value of his mortgage fund. What is the best response to give to Mr. Corelli?
Answer: B
Explanation:
Comprehensive and Detailed Explanation From Exact Extract:
Fixed-income securities, including mortgage funds, decrease in value when interest rates rise because existing mortgages with lower rates become less attractive compared to new, higher-yielding mortgages. The feedback from the document states:
"Fixed-income securities move in the opposite direction to market interest rates... Let's assume you are the fund manager for a mortgage mutual fund, which has mortgages paying 5%. If mortgage rates suddenly increase to 6%, only the interest rates on newly negotiated mortgages would increase... The investor would not pay you par for a 5% rate. If you wished to sell the mortgages, then you would have to lower your price until the price paid-given the 5% fixed payments to be made-results in a return to the buyer of 6%, the
'going rate' on mortgages. In other words, the market value of your par value mortgages must fall." Reference:Chapter 11 - Conservative Mutual Fund ProductsLearning Domain:Analysis of Mutual Funds
NEW QUESTION # 19
What type of shares offer its shareholders the opportunity to receive additional dividends if the company's profit exceeds a stated level?
Answer: B
Explanation:
Participating preferred shares are a type of preferred shares that offer its shareholders the opportunity to receive additional dividends if the company's profit exceeds a stated level. These dividends are paid in addition to the fixed dividends that are normally paid to preferred shareholders. Participating preferred shares allow shareholders to benefit from both fixed and variable income streams, depending on the company's performance. References: Participating Preferred Stock Definition - Investopedia, Preferred Shares Explained
| TD Direct Investing
NEW QUESTION # 20
Pippa purchased a 15-year bond with a face value of $5,000 and a 7% coupon rate at the time of issuance. The bond is due to mature later this year. The general interest rate climate remained stable for the first 13 years of the bond's term. However, especially over the past 18 months, both inflation and general interest rates have increased more than expected.
What is Pippa likely to experience from her bond?
Answer: D
Explanation:
According to the Canadian Investment Funds Course, inflation is the general increase in the prices of goods and services over time. Inflation reduces the purchasing power of money, meaning that a dollar can buy less in the future than it can today. Inflation also affects the returns of fixed income investments, such as bonds, which pay a fixed amount of interest and principal. If inflation is higher than expected, the real rate of return (the nominal rate minus inflation) of a bond will be lower than anticipated.
In this case, Pippa purchased a 15-year bond with a 7% coupon rate at the time of issuance. The bond is due to mature later this year. The general interest rate climate remained stable for the first 13 years of the bond's term. However, especially over the past 18 months, both inflation and general interest rates have increased more than expected. This means that Pippa will receive less purchasing power from her bond's interest and principal payments than she expected when she bought the bond. She will not experience a capital loss, as she will receive the full face value of $5,000 at maturity. She will also not benefit from a higher real rate of return, as inflation erodes the value of her fixed payments. She will not receive any capital appreciation, as the bond' s price does not change once it is held to maturity.
Therefore, the correct answer is C. The return of investment capital will have lower purchasing power than prior to investing.
1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 4: Fixed Income Securities)
NEW QUESTION # 21
An employer wants to offer his employees a pension plan. The goal is to provide a simple-to-understand plan that will reward all participants equally, regardless of their income level, and provide a retirement income based on a participant's years of service with the company. What plan will best meet his requirements?
Answer: D
Explanation:
Comprehensive and Detailed Explanation From Exact Extract:
A flat benefit plan is straightforward, provides retirement income based solely on years of service, and is not influenced by participants' income levels, making it ideal for the employer's requirements. The feedback from the document states:
"The flat benefit plan is simple to understand, provides a retirement income based solely on years of service, and is not affected by plan members' individual incomes." Reference:Chapter 6 - Tax and Retirement PlanningLearning Domain:The Know Your Client Communication Process
NEW QUESTION # 22
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