CSI CSI-IFC Online Practice Questions and Exam Preparation

CSI CSI-IFC Online Questions & Answers

• Question 291:

  You are concerned about upcoming weakness in the Canadian dollar.

  Which type of fund should you invest in?

  A. A specialty fund that uses derivatives to hedge the value of its portfolio
  B. An international fund that hedges its foreign currency risk
  C. A global fund that hedges its foreign currency risk
  D. A global fund that does not hedge its foreign currency risk
  D. A global fund that does not hedge its foreign currency risk

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  Explanation

  A global fund that does not hedge foreign currency risk benefits from a weakening Canadian dollar, as the value of foreign investments increases in Canadian dollar terms. The feedback from the document states: "Global mutual funds are attractive in that they can provide a hedge against a decline in the relative value of the Canadian dollar... It is important for mutual fund sales representatives to know whether their global mutual funds hedge foreign exchange risk, because some clients will want to bear that risk themselves, while others will not."

  References:

  Chapter 12 - Riskier Mutual Fund ProductsLearning Domain: Analysis of Mutual Funds

• Question 292:

  Sujay contributes 3% of his $60,000 salary to his employer's defined contribution pension plan. His employer contributes the same amount to the plan.

  How will this affect his registered retirement savings plan (RRSP) contribution room for the year?

  A. It will have no effect. RRSP contribution room is based on earned income only.
  B. It will reduce Suiay's contribution room by 51,800.
  C. It will reduce Suiay's contribution room by $1800
  D. It will reduce Suiay's contribution room by $3,600.
  D. It will reduce Suiay's contribution room by $3,600.

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  Explanation

  D is correct because Sujay's registered retirement savings plan (RRSP) contribution room for the year will be reduced by $3,600. This is because his employer's defined contribution pension plan is considered a registered pension plan (RPP), which affects his RRSP contribution room through a pension adjustment (PA). The PA is calculated as 18% of his earned income in the previous year minus his RPP contributions in the current year. In this case, Sujay's PA for the current year is $3,600, which is 18% of his $60,000 salary minus his 3% contribution ($1,800) and his employer's 3% contribution ($1,800). The PA reduces his RRSP contribution room for the next year by the same amount. It will have an effect on his RRSP contribution room (A), as it is not based on earned income only, but also on RPP contributions. It will not reduce his contribution room by $51,800 (B), as this is more than his earned income. It will not reduce his contribution room by $10,800 (C), as this is 18% of his earned income without subtracting his RPP contributions.

• Question 293:

  When reviewing a company's balance sheets, what ratio best determines whether their borrowing is excessive?

  A. The cash flow from operations / total debt ratio.
  B. The debt / equity ratio.
  C. The interest coverage ratio.
  D. The price / earnings ratio.
  B. The debt / equity ratio.

• Question 294:

  When purchasing a mutual fund, what is the correct way to determine the number of units purchased if the order was entered today at 2:30 p.m.

  ET?

  A. Use today's NAV
  B. Use the 2:30 p.m. ET NAV
  C. Use the average of today's and yesterday's NAV
  D. Use yesterday's NAV
  A. Use today's NAV

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  Explanation

  When an investor purchases a mutual fund, the price is based on the next NAVPS (Net Asset Value Per Share) calculated after the order is entered. Orders placed before 4:00 p.m. ET are priced at that day's closing NAV; orders after 4:00 p.m. are priced using the next business day's NAV. Since the order was placed at 2:30 p.m. ET, today's NAV applies.

• Question 295:

  A mutual fund has the objective of investing in both stocks and bonds.

  Which category best describes this fund?

  A. Money market fund
  B. Balanced fund
  C. Specialty fund
  D. Mortgage fund
  B. Balanced fund

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  Explanation

  Balanced funds combine equity and fixed-income investments to provide a mixture of growth potential and income. Money market funds focus on short-term debt instruments, while specialty funds focus on specific sectors or mandates.

  Therefore, Option B is correct.

• Question 296:

  Throughout the year, the Redwood Global Equity Fund generated the following outcomes: . $1.00 per unit of interest income from Canadian treasury bills . $2.50 per unit of dividend income from foreign corporations . $7.75 per unit of capital gains from the sale of Canadian corporations . $6.50 per unit of capital gains from the sale of foreign corporations .

  $2.00 per unit of capital losses from the sale of foreign corporations Given that the Redwood Global Equity Fund is structured as a mutual fund trust, which of the following statements is true?

  A. Redwood can flow the foreign dividends to unitholders, who can then take advantage of the dividend gross-up and tax credit mechanism.
  B. Unitholders will receive $12.25 per unit of net capital gains from Redwood, of which only 50% is subject to tax.
  C. Redwood can distribute the $2.00 per unit of capital losses to unitholders, who can then use them to offset their capital gains.
  D. Since Redwood pays the tax on foreign income, it does not distribute dividend or capital gains income from foreign sources to unitholders.
  B. Unitholders will receive $12.25 per unit of net capital gains from Redwood, of which only 50% is subject to tax.

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  Explanation

  This statement is true because a mutual fund trust can distribute its net income and net realized capital gains to its unitholders, and avoid paying tax at the fund level. The unitholders then report their share of the fund's income and capital gains on their tax returns, and pay tax according to their marginal tax rates. In this case, Redwood has generated $14.25 per unit of capital gains from the sale of Canadian and foreign corporations, and $2.00 per unit of capital losses from the sale of foreign corporations. Therefore, its net capital gains are $12.25 per unit ($14.25 - $2.00), which it can distribute to its unitholders. The unitholders will only include 50% of the net capital gains in their taxable income, as per the inclusion rate for capital gains in Canada1. The other 50% is tax-free. The other statements are false because:

  A. Redwood cannot flow the foreign dividends to unitholders, who can then take advantage of the dividend gross-up and tax credit mechanism. This mechanism only applies to dividends received from Canadian corporations that are eligible for the enhanced dividend tax credit or the ordinary dividend tax credit2. Foreign dividends are treated as foreign income, and are subject to withholding tax by the source country and income tax by Canada3.

  C. Redwood cannot distribute the $2.00 per unit of capital losses to unitholders, who can then use them to offset their capital gains. A mutual fund trust can only distribute its net income and net realized capital gains, not its capital losses4. However, a mutual fund trust can carry forward its capital losses indefinitely and use them to reduce its taxable capital gains in future years5.

  D. Redwood does not pay the tax on foreign income, and it does distribute dividend or capital gains income from foreign sources to unitholders. A mutual fund trust pays tax on its foreign income only if it does not distribute it to its unitholders in the same year it is earned. However, most mutual fund trusts distribute all or most of their foreign income to their unitholders, as they want to avoid paying tax at the fund level and maintain their status as a mutual fund trust. Canadian Investment Funds Course (CIFC) Study Guide, Chapter 7: Taxation, Section 7.3: Taxation of Mutual Funds, page 7-10 Canadian Investment Funds Course (CIFC) Study Guide, Chapter 7: Taxation, Section 7.2: Taxation of Investment Income, page 7-4 Foreign Income - Canada.ca Mutual Fund Trusts - Canada.ca Capital Losses and Deductions - Canada.ca Taxation of Foreign Income - IFSE Institute Mutual Fund Trusts - IFSE Institute

• Question 297:

  Quinton, a Dealing Representative, meets with his client Banji. Banji's Know Your Client (KYC) indicates that her risk profile is "medium''. Banji currently has $35,000 in her account which is invested 50% in the Middleton Balanced Fund and 50% in the Hector Growth Fund. She tells Quinton that she would like to contribute an additional $10,000 to purchase the Prospect Labour-Sponsored Fund.

  Which of the following statements about Banji's proposed transaction is CORRECT?

  A. Quinton can proceed with the purchase of the Prospect Labour-Sponsored Fund because it is suitable for Banji based on her current KYC.
  B. Quinton should update Banji's risk profile to "high" so that he can proceed with the purchase of the Prospect Labour-Sponsored Fund.
  C. Quinton should not proceed with the purchase of the Prospect Labour-Sponsored Fund because it is not suitable for Banji based on her current KYC.
  D. Quinton must provide Banji with full disclosure about the risks so that he can proceed with the purchase of the Prospect Labour-Sponsored Fund.
  C. Quinton should not proceed with the purchase of the Prospect Labour-Sponsored Fund because it is not suitable for Banji based on her current KYC.

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  Explanation

  A labour-sponsored investment fund (LSIF) is a type of mutual fund that invests in small and medium-sized businesses that are not publicly traded. LSIFs are sponsored by labour unions or associations and offer tax credits to investors.

  However, LSIFs are also very risky and illiquid investments that may not be suitable for investors with a medium risk profile, such as Banji. Therefore, Quinton should not proceed with the purchase of the Prospect Labour-Sponsored Fund because it is not suitable for Banji based on her current KYC. Therefore, C is the correct answer.

  References:

  Labour-Sponsored Investment Funds (LSIFs): Definition and How They Work - Investopedia, Canadian Investment Funds Course (CIFC) | IFSE Institute

• Question 298:

  Sonya, a mutual fund manager for Drake Financial, has had a stellar year in managing their Canadian equity portfolio and has outperformed the benchmark by over 200 basis points. She is now concerned that within the last couple of months of this calendar year, the Canadian equity market is due for a 10 to 15% pullback.

  Which investment strategy would be most appropriate for her to implement for the last couple of months of the year to offset the market correction?

  A. Buy put options on the iShares S&P/TSX 60 Index Fund
  B. Buy call options on the iShares S&P/TSX 60 Index Fund
  C. Increase her equity exposure to the consumer staples sector
  D. Reduce her equity exposure to the energy sector
  A. Buy put options on the iShares S&P/TSX 60 Index Fund

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  Explanation

  To protect against a market decline, purchasing put options on an index fund like the iShares S&P/TSX 60 allows the portfolio to offset losses by gaining value if the market falls. The feedback from the document states: "A fund manager may have experienced a rapid growth in the value of her portfolio, but is concerned that the market may fall. To protect herself against a fall in value, she purchases put options on the iShares S&P/TSX 60 Index Fund (i60s).

  If the market declines, the fall in value of the portfolio is offset by an increase in the value of the put options."

  References:

  Chapter 7 - Types of Investment Products and How They Are TradedLearning Domain: Understanding Investment Products and Portfolios Exam C

• Question 299:

  What type of risk is the fundamental risk factor for fixed-income securities?

  A. Liquidity risk
  B. Reinvestment risk
  C. Market risk
  D. Interest rate risk
  D. Interest rate risk

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  Explanation

  Interest rate risk is the primary risk for fixed-income securities, as their value decreases when interest rates rise due to fixed cash flows. The feedback from the document states: "Interest rate risk is the fundamental risk factor for fixed-income securities such as bonds, mortgages and preferred shares. As interest rates move up, the value of a fixed-income security falls. This is because the cash flow from the fixed-income security is fixed."

  References:

  Chapter 11 - Conservative Mutual Fund ProductsLearning Domain: Analysis of Mutual Funds

• Question 300:

  Your client, a high-income earner in a high marginal tax bracket, is seeking to minimize the amount of tax he pays on investment income while continuing to invest in mutual funds.

  Which mutual fund would best meet his investment objective?

  A. Fixed-income fund
  B. Canadian equity fund
  C. Money market fund
  D. Foreign equity fund
  B. Canadian equity fund

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  Explanation

  Canadian equity funds are tax-efficient for high-income earners as they generate dividends and capital gains, which are taxed at lower rates than interest income. The feedback from the document states: "Of the funds listed, the most tax-effective would be a Canadian equity fund because it should generate some dividends and some capital gains. Money market funds and fixed income funds would each generate highly taxed interest income, while a foreign equity fund would not generate tax-advantaged Canadian dividend income or capital gains. Before recommending an equity fund, the mutual fund representative should ensure that the fund is suitable for his client because equity funds have a higher risk profile than funds that generate interest income."

  References:

  Chapter 6 - Tax and Retirement PlanningLearning Domain: The Know Your Client Communication Process