IFC Products and Trading 2 — Questions and Answers
Question 1: Which of the following best describes a closed-end fund in Canada?
- It issues a fixed number of shares traded on a stock exchange (Correct answer)
- It continuously issues and redeems units at NAV
- It is only available to accredited investors
- It must invest exclusively in fixed-income securities
Correct answer: It issues a fixed number of shares traded on a stock exchange
A closed-end fund issues a fixed number of shares that trade on a stock exchange at market prices, which may differ from NAV.
Question 2: What is the primary difference between a money market fund and a bond fund?
- Money market funds invest in short-term, high-quality debt instruments (Correct answer)
- Bond funds only hold government securities
- Money market funds have higher risk than bond funds
- Bond funds maintain a stable $1.00 NAV
Correct answer: Money market funds invest in short-term, high-quality debt instruments
Money market funds invest in short-term, high-quality instruments such as T-bills and commercial paper, while bond funds hold longer-duration fixed-income securities.
Question 3: When a mutual fund declares a distribution, what happens to its NAV per unit?
- NAV decreases by the amount of the distribution (Correct answer)
- NAV increases by the amount of the distribution
- NAV remains unchanged
- NAV is suspended until the distribution is paid
Correct answer: NAV decreases by the amount of the distribution
When a distribution is paid out, the fund's assets decrease by that amount, causing the NAV per unit to drop accordingly.
Question 4: Which trading mechanism applies to exchange-traded funds (ETFs) that does NOT apply to traditional mutual funds?
- ETFs can be sold short and bought on margin (Correct answer)
- ETFs calculate NAV once per day
- ETFs charge deferred sales charges
- ETFs require a minimum investment period
Correct answer: ETFs can be sold short and bought on margin
Because ETFs trade on exchanges like stocks, they can be sold short and purchased on margin, unlike traditional mutual funds.
Question 5: A fund-of-funds structure in Canada refers to a mutual fund that:
- Invests primarily in units of other mutual funds (Correct answer)
- Holds shares of publicly traded companies only
- Charges no management fee
- Is exempt from prospectus requirements
Correct answer: Invests primarily in units of other mutual funds
A fund-of-funds invests in other mutual funds rather than directly in securities, providing diversification across multiple fund managers.
Question 6: Which statement about segregated funds is correct?
- They offer maturity and death benefit guarantees not found in mutual funds (Correct answer)
- They are regulated under the Securities Act like mutual funds
- They do not allow for beneficiary designations
- They trade on stock exchanges during market hours
Correct answer: They offer maturity and death benefit guarantees not found in mutual funds
Segregated funds are insurance products that provide maturity and death benefit guarantees, distinguishing them from mutual funds regulated under securities law.
Question 7: What is 'market impact cost' in the context of trading fund securities?
- The adverse price movement caused by a large trade execution (Correct answer)
- The annual management expense charged to the fund
- The difference between the bid and ask spread on a bond
- The penalty for early redemption of a mutual fund
Correct answer: The adverse price movement caused by a large trade execution
Market impact cost is the price movement a large order causes against the trader, increasing the effective cost of executing large trades.
IFC Products and Trading 2
Which of the following best describes a closed-end fund in Canada?