IFC Products and Trading 4 — Questions and Answers
Question 1: A 'deferred sales charge' (DSC) mutual fund means the investor:
- Pays a redemption fee if units are sold within a specified time period (Correct answer)
- Pays an upfront commission at the time of purchase
- Is exempt from all sales charges permanently
- Pays a flat annual fee instead of a commission
Correct answer: Pays a redemption fee if units are sold within a specified time period
DSC funds charge a redemption fee that decreases over time, incentivizing investors to hold units for the full schedule period before selling.
Question 2: Which statement about real estate investment trusts (REITs) trading in Canada is CORRECT?
- REITs trade on stock exchanges and must distribute most taxable income to unitholders (Correct answer)
- REITs are privately held and not available to retail investors
- REITs are subject to the same regulations as money market funds
- REITs must invest exclusively in residential real estate
Correct answer: REITs trade on stock exchanges and must distribute most taxable income to unitholders
Canadian REITs trade on the TSX and are required to distribute the majority of their taxable income to unitholders each year.
Question 3: What is the significance of the 'forward pricing' rule for mutual fund transactions in Canada?
- Orders are executed at the next calculated NAV after the order is received (Correct answer)
- Orders are filled at the previous business day's closing NAV
- Investors can lock in a price before market open for that day
- The fund manager has discretion to set transaction prices
Correct answer: Orders are executed at the next calculated NAV after the order is received
Forward pricing ensures mutual fund orders are processed at the NAV calculated after the order is received, preventing price manipulation.
Question 4: A 'balanced fund' differs from a pure equity fund in that it:
- Holds both equities and fixed-income securities to manage risk (Correct answer)
- Invests only in foreign markets for geographic balance
- Is required to maintain a 50/50 split between stocks and cash
- Provides a guaranteed income stream each month
Correct answer: Holds both equities and fixed-income securities to manage risk
A balanced fund holds a mix of equities and bonds to provide growth potential while moderating volatility.
Question 5: Which of the following is NOT a characteristic of exchange-traded notes (ETNs)?
- ETNs provide direct ownership of the underlying assets (Correct answer)
- ETNs are unsecured debt obligations of the issuing bank
- ETN returns are linked to a market index or benchmark
- ETNs carry credit risk of the issuer
Correct answer: ETNs provide direct ownership of the underlying assets
ETNs are debt instruments issued by banks; investors do not own underlying assets and are exposed to the issuer's credit risk.
Question 6: Under Canadian rules, which entity is responsible for calculating a mutual fund's NAV?
- The fund's administrator or custodian, not the portfolio manager (Correct answer)
- The investment dealer selling the fund units
- The provincial securities regulator
- The mutual fund dealer network collectively
Correct answer: The fund's administrator or custodian, not the portfolio manager
The fund administrator or custodian calculates NAV independently from the portfolio manager to ensure accuracy and prevent conflicts of interest.
Question 7: What does 'soft dollar' arrangement mean in Canadian fund trading?
- A broker provides research or other services in exchange for directing trades to that broker (Correct answer)
- A mutual fund pays commissions in foreign currency
- A fund manager reduces fees when markets decline
- A dealer provides discounted commissions to retail clients
Correct answer: A broker provides research or other services in exchange for directing trades to that broker
Soft dollar arrangements involve a fund manager directing brokerage business to a dealer in exchange for research or services, which regulators scrutinize for conflicts of interest.
IFC Products and Trading 4
A 'deferred sales charge' (DSC) mutual fund means the investor: