IFC - Investment Funds in Canada Investment Products and Trading Questions and Answers

Question 1

An investor has just sold their house and needs to invest a large sum of cash for three months before purchasing a new property. Their primary objectives are capital preservation and liquidity. Which type of mutual fund is MOST suitable for this investor?

Accepted Answer

Money Market Fund

Answer

Money market funds are designed for short-term investors seeking safety of principal and high liquidity. They invest in high-quality, short-term debt securities like treasury bills and commercial paper, making them ideal for temporarily holding cash. The other options carry higher market and interest rate risks, which are unsuitable for a short time horizon where capital preservation is key.

Question 2

Which of the following is a primary characteristic of a cumulative preferred share?

Accepted Answer

Any missed dividend payments must be paid out to preferred shareholders before any dividends can be paid to common shareholders.

Answer

The 'cumulative' feature of preferred shares ensures that any dividends that are missed (in arrears) must accumulate and be paid in full to preferred shareholders before the company can resume paying dividends to its common shareholders. Preferred shares typically have limited or no voting rights, and the right to convert is a feature of 'convertible' preferreds, not all cumulative preferreds.

Question 3

An investor holds shares of XYZ Corp, currently trading at $50 per share. The investor wants to protect against a significant downturn and decides to sell the shares automatically if the price falls to a specific level. Which type of order should they place?

Accepted Answer

Stop-Loss Order

Answer

A stop-loss order is specifically designed to limit an investor's loss on a security position. It becomes a market order to sell when the stock price falls to or below the specified 'stop' price. A market order would sell immediately, a limit order sets a minimum price for selling (used to take profits), and a day order only specifies the order's duration.

Question 4

What is the primary source of return for an investor who holds a stripped bond (zero-coupon bond) until maturity?

Accepted Answer

The capital gain resulting from the difference between the discounted purchase price and the bond's par value at maturity.

Answer

Stripped bonds, or zero-coupon bonds, do not pay periodic interest. They are purchased at a deep discount to their face (par) value. The investor's entire return is the difference between the discounted purchase price and the full par value received when the bond matures. While this return is taxed as interest income annually, it is realized as the appreciation of the bond's price over its term.

Question 5

An investor is looking for a diversified investment in the S&P/TSX 60 index. They value the ability to buy and sell their holdings throughout the trading day at live market prices. Which product structure best meets their needs?

Accepted Answer

An Exchange-Traded Fund (ETF) tracking the index.

Answer

Exchange-Traded Funds (ETFs) are traded on stock exchanges like individual stocks, allowing for intraday trading where prices fluctuate based on real-time supply and demand. In contrast, open-end mutual funds are priced only once per day at the close of trading (Net Asset Value Per Share), and segregated funds and PPNs have different primary features and do not offer the same intraday liquidity.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Investment Products and Trading Questions and Answers