Practice Test GeeksIFC - Investment Funds in Canada Practice Test
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Products and Trading Flashcards

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  1. Under Canadian securities regulation, what is a 'principal-protected note' (PPN)?

    Answer: A structured product that guarantees return of principal at maturity

    A PPN is a structured product that guarantees the investor will receive at least the original principal back at maturity, while providing exposure to an underlying asset.

  2. Which order type guarantees execution but not price when trading an ETF?

    Answer: Market order

    A market order guarantees execution at the best available price but does not guarantee a specific price, unlike a limit order.

  3. What distinguishes a 'labour-sponsored investment fund' (LSIF) from a conventional mutual fund?

    Answer: LSIFs invest in small- and medium-sized businesses and offer tax credits

    LSIFs are venture capital funds sponsored by labour organizations that invest in SMEs and provide investors with federal and provincial tax credits.

  4. A mutual fund's management expense ratio (MER) does NOT typically include:

    Answer: Brokerage commissions paid on portfolio trades

    Portfolio trading commissions are generally excluded from the MER and are instead reported separately as part of the trading expense ratio (TER).

  5. Which of the following best describes the creation/redemption mechanism unique to ETFs?

    Answer: Designated brokers exchange baskets of securities for ETF units with the fund

    Designated brokers (market makers) create or redeem large blocks of ETF units by exchanging the underlying basket of securities with the ETF manager, keeping market price close to NAV.

  6. What is 'tracking error' in the context of index-based investment products?

    Answer: The deviation between a fund's return and its benchmark index return

    Tracking error measures how closely a fund replicates its benchmark, with higher values indicating greater divergence from index performance.

  7. Which factor would most likely cause an ETF to trade at a discount to its NAV?

    Answer: Selling pressure and low liquidity in the underlying securities

    When investors sell an ETF heavily and the underlying market is illiquid, market price can fall below NAV, creating a discount.