CSI CSI-IFC Online Practice Questions and Exam Preparation

CSI CSI-IFC Online Questions & Answers

• Question 361:

  Your client Jerry's asset mix is deviating from the original target asset mix because the stock market has had strong performance. Equities are now over-weighted in Jerry's account. The original target asset mix is still valid since Jerry's situation has not changed. He is invested in several bond and equity mutual funds.

  What should you do?

  A. advise him to change his know your client (KYC) form to reflect more growth
  B. advise him to do nothing since equities could outperform bonds in the next year
  C. advise him to sell a portion of assets invested in bond funds and reinvest the proceeds into equity funds
  D. advise him to sell a portion of assets invested in equity funds and reinvest the proceeds into bond funds
  D. advise him to sell a portion of assets invested in equity funds and reinvest the proceeds into bond funds

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  Explanation

  According to the Canadian Investment Funds Course, asset mix rebalancing is the process of restoring the portfolio to its original or target asset allocation by selling or buying assets. Asset mix rebalancing is necessary to maintain the desired level of risk and return, as well as to align the portfolio with the investor's objectives and circumstances. Asset mix rebalancing can be done periodically, such as annually or quarterly, or based on a threshold, such as when an asset class deviates from its target weight by a certain percentage.

  In this case, Jerry's asset mix is deviating from the original target asset mix because the stock market has had strong performance. Equities are now over-weighted in Jerry's account. The original target asset mix is still valid since Jerry's situation has not changed. He is invested in several bond and equity mutual funds. Therefore, the best course of action is to advise him to sell a portion of assets invested in equity funds and reinvest the proceeds into bond funds. This will bring his portfolio back to its target asset mix and reduce his exposure to equity risk.

  The other options are not advisable because: Advising him to change his know your client (KYC) form to reflect more growth would imply that his risk tolerance and objectives have changed, which is not the case. Changing the KYC form would also require a new suitability assessment and documentation.

  Advising him to do nothing since equities could outperform bonds in the next year would ignore the importance of asset mix rebalancing and expose him to more risk than he is comfortable with. Doing nothing would also mean that his portfolio is not aligned with his original plan and expectations. Advising him to sell a portion of assets invested in bond funds and reinvest the proceeds into equity funds would further increase his equity weight and risk, which is contrary to his original target asset mix and risk tolerance.

  Therefore, the correct answer is D. advise him to sell a portion of assets invested in equity funds and reinvest the proceeds into bond funds.

  1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 10: Portfolio Management)

• Question 362:

  What is the level of risk associated with a mortgage fund compared to other types of funds?

  A. More risk than a precious metals fund, but less risk than a specialty fund
  B. More risk than a money market fund, but less risk than a bond fund
  C. More risk than a balanced fund, but less risk than a real estate fund
  D. More risk than a dividend fund, but less risk than an equity fund
  D. More risk than a dividend fund, but less risk than an equity fund

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  Explanation

  The correct answer is D. More risk than a dividend fund, but less risk than an equity fund. The Investment Funds in Canada curriculum explains that mortgage funds invest primarily in residential and commercial mortgages, generating income from interest payments.

  Mortgage funds carry credit risk, interest rate risk, and liquidity risk, making them riskier than traditional dividend or fixed-income funds, which often hold publicly traded securities. However, they are generally less volatile than equity funds, which are subject to broader market fluctuations and business risk. Dividend funds typically invest in established companies with stable cash flows and are therefore less risky than mortgage funds. Equity funds expose investors to full market risk and price volatility, placing them at a higher risk level than mortgage funds.

  The CIFC course places mortgage funds in the mid-risk spectrum, between income-oriented equity funds and growth-oriented equity funds. Therefore, Option D is the correct and fully CIFC-verified answer.

• Question 363:

  Pierre buys a call option on a stock.

  What is the implication of this transaction?

  A. Pierre has the right to buy the stock if he exercises the option.
  B. Pierre is obligated to sell the stock if the option is exercised.
  C. Pierre has the right to sell the stock if he exercises the option.
  D. Pierre is obligated to buy the stock if the option is exercised.
  A. Pierre has the right to buy the stock if he exercises the option.

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  Explanation

  According to the What Is a Call Option and How to Use It With Example - Investopedia, a call option is a contract that gives the buyer the right, but not the obligation, to buy an underlying stock at a specified price (the strike price) within a specified time period (the expiration date). The seller of a call option is obligated to sell the stock if the buyer exercises the option. Pierre buys a call option on a stock, which means he has the right to buy the stock if he exercises the option.

  He can also choose not to exercise the option or sell it before expiration.

• Question 364:

  Apex Mutual Fund has been structured to avoid taxation by distributing any net interest, dividends, and capital gains to unitholders each calendar year.

  This is an example of what type of mutual fund structure?

  A. Closed-end mutual fund
  B. Mutual fund trust
  C. Open-ended mutual fund
  D. Mutual fund corporation
  B. Mutual fund trust

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  Explanation

  A mutual fund trust structure allows the fund to avoid taxation by distributing its income to unitholders. The feedback from the document states: "The most common structure for mutual funds in Canada is the open-end trust. The trust structure allows a fund itself to avoid taxation. Any interest, dividends and capital gains income, net of the fund's fees, expenses and capital losses, if passed to its unitholders each calendar year, will allow the trust to avoid being taxed on its income."

  References:

  Chapter 10 - The Modern Mutual FundLearning Domain: The Modern Mutual Fund

• Question 365:

  Which statement regarding Canada's income tax system is CORRECT?

  A. Federal and provincial income tax brackets are both progressive and each respective jurisdiction determines the tax rates that will be used.
  B. Once a person's taxable income reaches the next income tax bracket level, all income is subject to be taxed at the higher tax rate.
  C. Tax credits will reduce an individual's taxable income and may lower that person's top marginal tax rate.
  D. After federal and provincial tax rates have been applied to a person's taxable income, tax deductions are then applied to reduce taxes.
  A. Federal and provincial income tax brackets are both progressive and each respective jurisdiction determines the tax rates that will be used.

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  Explanation

  Canada's income tax system is based on a progressive tax structure, which means that individuals pay higher tax rates as their income increases. There are different tax brackets for different income levels, and each bracket has a corresponding tax rate. The federal government and each provincial or territorial government set their own tax rates and brackets, which may vary depending on the jurisdiction. Therefore, individuals pay both federal and provincial or territorial income tax, based on their taxable income and the tax rates applicable to their income brackets in their respective jurisdictions12

  References:

  5: Types of Investments, Lesson

  6: Taxation, Section 5.6.1: Income Tax 1

  CIFC prepkit, Chapter 5: Types of Investments,

• Question 366:

  Sven owns preferred shares that give him the option to sell his holdings back to the issuing company at a predetermined price and within a specified time.

  What type of preferred shares does Sven own?

  A. retractable
  B. participating
  C. convertible
  D. redeemable
  A. retractable

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  Explanation

  A is correct because retractable preferred shares are a type of preferred shares that give the holder the option to sell the shares back to the issuer at a predetermined price and within a specified time. This feature provides the holder with more flexibility and protection against interest rate fluctuations. Participating preferred shares (B) are a type of preferred shares that give the holder the right to receive additional dividends if the issuer's earnings exceed a certain level.

  Convertible preferred shares (C) are a type of preferred shares that give the holder the option to convert the shares into common shares of the issuer at a predetermined ratio and price. Redeemable preferred shares (D) are a type of preferred shares that give the issuer the option to buy back the shares from the holder at a predetermined price and within a specified time.

• Question 367:

  What is a permissible selling practice for mutual fund representatives?

  A. Offering to repurchase.
  B. Quoting a future price.
  C. Advertising a registration.
  D. Accepting gifts of low value.
  D. Accepting gifts of low value.

• Question 368:

  Which of the following statements are CORRECT about labour sponsored investment funds (LSIFs)?

  A. LSIFs are appropriate for investors with a short-term time horizon.
  B. All provinces offer some sort of additional tax credit for investors.
  C. LSIFs are suitable for investors with a low risk tolerance.
  D. Investors will forfeit their tax credits if they redeem their LSIF investment before 8 years have elapsed.
  D. Investors will forfeit their tax credits if they redeem their LSIF investment before 8 years have elapsed.

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  Explanation

  LSIFs are a type of investment fund that provide venture capital to small and medium-sized Canadian businesses, while offering tax benefits to investors. However, LSIFs are also considered high-risk and illiquid investments, as they invest in private companies that may not have a proven track record or marketability. Therefore, LSIFs are not suitable for investors with a short-term time horizon or a low risk tolerance. Investors who buy LSIFs receive a 15% federal tax credit and may also receive an additional provincial tax credit, depending on the province where they reside. However, these tax credits are conditional on holding the LSIF investment for at least 8 years. If investors redeem their LSIF investment before the 8-year period, they will have to repay the tax credits they received. Canadian Investment Funds Course, Chapter 4: Types of Investments1

• Question 369:

  Which of the following transactions takes place in the secondary market?

  A. Issue of new debt and equity securities
  B. Sale of mutual funds
  C. Issue of federal Treasury bills
  D. Resale of previously issued securities
  D. Resale of previously issued securities

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  Explanation

  The secondary market involves trading previously issued securities between investors, enabling liquidity for those who initially purchased the securities. The feedback from the document states: "The secondary market involves the resale of previously issued securities between investors. It enables investors who originally bought the investment products to sell them and obtain cash."

  References:

  Chapter 2 - Overview of the Canadian Financial MarketplaceLearning Domain: An Introduction to the Mutual Funds Marketplace

• Question 370:

  A mutual fund sales representative receives a client's purchase order for equity mutual funds and confirms that the order is appropriate based on the client's recorded investment knowledge and risk tolerance. The client explains that she had inherited the funds from a family member. The client states her investment objective to be long term. The representative records this information and processes the order.

  What the representative doesn't know is that the client has recently lost her job and is living on unemployment insurance.

  What step did the representative need to take in order to uphold her duty of care?

  A. The representative should have applied the test of suitability to the unsolicited order
  B. The representative should have verified that the client's KYC information was updated before applying the suitability test
  C. The representative should have probed the client's understanding of equity funds
  D. The representative should have applied due diligence in matching the order to the client's KYC information
  B. The representative should have verified that the client's KYC information was updated before applying the suitability test

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  Explanation

  The representative failed to verify that the client's KYC information was current, which is critical for assessing suitability, especially given the client's recent job loss. The feedback from the document states: "Standard A - Duty of Care starts with the Know Your Client rule. It is impossible to apply due diligence and assess the suitability of an investment if the client's information has not been updated. Client account documentation should reflect all material information about the client's current status, and should be updated to reflect any material change to the client's status in order to assure suitability of investment recommendations."

  References:

  Chapter 18 - Applying Ethical Standards to What You Have LearnedLearning Domain: Ethics, Compliance and Mutual Fund Regulations