CIFC Types of Investment Funds 2 — Questions and Answers
Question 1: Which type of investment fund issues a fixed number of shares that trade on a stock exchange?
- Open-end mutual fund
- Closed-end fund (Correct answer)
- Segregated fund
- Money market fund
Correct answer: Closed-end fund
Closed-end funds issue a fixed number of shares through an IPO, after which shares trade on a stock exchange at market prices.
Question 2: A segregated fund is best described as:
- A fund that segregates equity from fixed income assets
- An insurance product that combines investment with a maturity or death benefit guarantee (Correct answer)
- A fund restricted to accredited investors only
- A mutual fund with a fixed investment term
Correct answer: An insurance product that combines investment with a maturity or death benefit guarantee
Segregated funds are insurance contracts that provide investment growth potential along with a guarantee of at least 75–100% of premiums at maturity or death.
Question 3: What is the primary characteristic of a money market fund?
- It invests in long-term government bonds for maximum yield
- It holds short-term, high-quality debt instruments to preserve capital (Correct answer)
- It tracks a stock market index with no active management
- It guarantees a fixed rate of return over a specified term
Correct answer: It holds short-term, high-quality debt instruments to preserve capital
Money market funds invest in short-term, highly liquid, and high-quality instruments such as T-bills and commercial paper to preserve capital.
Question 4: How does a labour-sponsored investment fund (LSIF) differ from a conventional mutual fund?
- LSIFs invest exclusively in government bonds
- LSIFs invest in small and emerging Canadian businesses and offer federal and provincial tax credits (Correct answer)
- LSIFs are only available to institutional investors
- LSIFs have no redemption restrictions
Correct answer: LSIFs invest in small and emerging Canadian businesses and offer federal and provincial tax credits
LSIFs invest in small and emerging Canadian companies and provide investors with federal and provincial tax credits, but typically have an 8-year holding period.
Question 5: Which statement about exchange-traded funds (ETFs) is CORRECT?
- ETFs can only be purchased directly from the fund company
- ETFs are priced only at the end of each trading day like mutual funds
- ETFs trade continuously on a stock exchange throughout the trading day (Correct answer)
- ETFs must be actively managed by a portfolio manager
Correct answer: ETFs trade continuously on a stock exchange throughout the trading day
ETFs trade on a stock exchange throughout the day at market prices, unlike mutual funds which are priced once daily at NAV.
Question 6: A fund of funds is characterized by:
- Investing directly in individual stocks and bonds
- Holding shares of other mutual funds rather than individual securities (Correct answer)
- Offering a guaranteed return based on a benchmark index
- Restricting investments to a single industry sector
Correct answer: Holding shares of other mutual funds rather than individual securities
A fund of funds achieves diversification by investing in units of other mutual funds rather than in individual securities directly.
Question 7: When a closed-end fund's shares trade at a price below its net asset value (NAV), the fund is said to be trading at a:
- Premium
- Par
- Discount (Correct answer)
- Redemption price
Correct answer: Discount
When a closed-end fund's market price is below its NAV per share, it is trading at a discount, which can present a potential opportunity for investors.
CIFC Types of Investment Funds 2
Which type of investment fund issues a fixed number of shares that trade on a stock exchange?