ITF > ITF Chapter 1 > Flashcards

ITF Chapter 1 Flashcards

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1
Q

What is the money market?

A

A trading place for short-term financial assets, typically those with a maturity of less than one year.

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2
Q

What are Treasury Bills (T-bills)?

A

Short-term debt instruments issued by the Federal Government and some provinces.

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3
Q

How often does the Bank of Canada auction T-bills?

A

Every two weeks.

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4
Q

How do T-bills trade?

A

Always at a discount and mature at full face value.

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5
Q

What are the two main features of T-bills?

A
  • Liquidity
  • Low risk
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6
Q

What type of investors do T-bills appeal to?

A

Risk-averse investors.

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7
Q

What is Commercial Paper (CP)?

A

An unsecured promissory note issued by a corporation or an asset-backed security.

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8
Q

What is the typical range for the maturity of commercial paper?

A

Less than three months to one year.

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9
Q

What is the minimum initial investment for commercial paper?

A

$25,000.

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10
Q

What are the main categories of fixed-income capital market asset classes?

A
  • Government of Canada bonds
  • Provincial and municipal bonds
  • Corporate bonds
  • Mortgage securities
  • Preferred stocks
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11
Q

What is a Guaranteed Investment Certificate (GIC)?

A

A fixed rate of interest for a specific term, with guaranteed principal and interest payments.

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12
Q

What are the two types of GICs?

A
  • Redeemable
  • Non-redeemable
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13
Q

What is a feature of non-redeemable GICs?

A

Cannot be cashed before maturity, except in specific circumstances.

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14
Q

What is an escalating-rate GIC?

A

A GIC where the interest rate increases over the term.

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15
Q

What is a laddered GIC?

A

An investment divided into multiple term lengths to reduce interest rate risk.

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16
Q

What is a strip bond?

A

A bond created when future-dated interest coupons are separated from the underlying bond.

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17
Q

What do mortgage-backed securities (MBS) represent?

A

Shares in pools of home mortgages with similar terms and interest rates.

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18
Q

What is the primary risk factor for corporate bonds compared to government bonds?

A

Default risk.

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19
Q

What is a convertible bond?

A

A bond that can be converted into a specified number of common shares.

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20
Q

What is the difference between secured and unsecured corporate bonds?

A

Secured bonds have collateral backing, while unsecured bonds (debentures) do not.

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21
Q

What are preferred stocks?

A

Stocks that pay fixed dividends and have no voting power.

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22
Q

How do common stocks differ from preferred stocks?

A

Common stocks give residual claims to earnings and assets, while preferred stocks pay fixed dividends.

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23
Q

What does ownership of common stock represent?

A

Ownership of a firm.

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24
Q

What is the voting right associated with common shares?

A

Each holder is entitled to one vote in the election of directors.

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25
What is the role of a firm's board of directors regarding dividends?
The board controls if, when, and how dividends are paid
26
What is the typical form of dividend payment?
Generally in cash, but can be supplemented with share dividends
27
How many votes does each holder of a common share have?
One vote in the election of directors and other special elections
28
What is a proxy statement?
A document shareholders sign to assign their votes to management
29
Do common shares have a maturity date?
No, they do not mature
30
What is typically expected from the rate of return on stock?
Equal to the expected dividend yield and expected capital gains yield
31
What is a rights offering?
A privilege allowing existing shareholders to acquire additional shares
32
What is the exercise price of a right called?
Subscription price or offering price
33
What differentiates a warrant from a right?
Warrants have a longer term, typically one to seven years
34
What are derivatives?
Financial instruments whose value is derived from an underlying asset
35
What is an option contract?
A contract granting the right to buy or sell an underlying asset at a specified price
36
What is a call option?
An option that gives its holder the right to buy the underlying asset
37
What is a put option?
An option that gives its holder the right to sell the underlying asset
38
What is a futures contract?
An agreement for the future delivery of an asset at a specified date
39
What percentage of the value is typically required as a margin for futures contracts?
About 10% of the value of the contract
40
Who are the two types of investors in futures contracts?
Hedgers and speculators
41
What is a forward contract?
A contract where one party agrees to buy a commodity at a specific price on a specific future date
42
What is a mutual fund?
A pool of savings contributed by many investors and invested by a professional manager
43
What is the net asset value (NAV) of a mutual fund?
Current market value of all securities held by the fund divided by the number of units held
44
What is a load in mutual funds?
A sales fee that the investor pays when the fund is purchased
45
What is a no-load fund?
A mutual fund that charges no commission
46
What does the Management Expense Ratio (MER) represent?
The management cost of the fund as a percentage of the fund's average net asset value
47
True or False: Warrants are typically issued as standalone securities.
False, they are usually issued as an add-on to bonds or preferred shares
48
Fill in the blank: The exercise price of a right is known as the _______.
subscription price
49
What is the primary purpose of hedgers in futures markets?
To use futures as insurance against price fluctuations
50
What is the typical expiration date for options?
The third Friday of the expiration month
51
What differentiates open-end from closed-end mutual funds?
Open-end funds allow for the purchase or redemption of units; closed-end funds have a fixed number of shares
52
What are commissions in the context of mutual funds?
Commissions, also known as 'loads', are sales fees that the investor pays when the fund is purchased.
53
What is a no-load fund?
Funds that charge no commission or service fee.
54
Name the five broad categories of mutual funds based on investment objectives.
* Income funds * Balanced funds * Growth funds * Global funds * Specialized funds
55
What do money market funds primarily invest in?
Treasury bills and other low-risk short-term investments.
56
What is the average maturity of a money market fund?
No more than 90 days.
57
What is the risk level of mortgage funds compared to money market funds?
Higher risk than money market funds but lower than bond funds.
58
What do bond funds primarily invest in?
Bonds issued by governments, corporations, and foreign governments.
59
How are dividend funds characterized?
They invest primarily in high-yielding preferred and common shares.
60
What is the risk level of balanced funds?
Considered to be moderate risk.
61
What distinguishes tactical balanced funds from strategic balanced funds?
Tactical balanced funds have no restriction on the proportions of investment.
62
What is the primary investment objective of growth funds?
Capital appreciation.
63
What does 'small cap' refer to in the context of growth funds?
Firms with a relatively low market value.
64
What is an index fund?
A fund that matches its portfolio to that of a specific financial market index.
65
What are exchange-traded funds (ETFs)?
Baskets of securities that are constructed like mutual funds but traded like individual stocks.
66
What is a major advantage of real estate investment trusts (REITs)?
They receive special tax considerations.
67
What is a segregated fund?
An insurance contract with an investment that produces returns and an insurance policy covering risk.
68
What are the three parties covered by a segregated fund contract?
* The contract holder * The annuitant * The beneficiary
69
What is 'imputed rent' in the context of owner-occupied housing?
The economic benefit derived from owning a home, valued at the rental cost that would otherwise have to be paid.
70
What is the primary characteristic of income-producing real estate?
Expected to earn current rental income and may appreciate in value over time.
71
How does the stability of rental income in residential real estate compare to commercial real estate?
Residential real estate is generally more stable due to a larger number of leases.
72
What are collectibles?
Antiques, art, coins, and stamps, whose secondary markets are unregulated and fragmented.
73
What types of assets are considered precious metals?
* Gold * Silver * Diamonds
74
What do precious metals and collectibles have in common regarding investment returns?
Both depend solely on uncertain terminal values and pay no interim cash flows.
75
What is a key factor to consider when allocating investment funds to various asset classes?
The risk-return relationship for each asset class.
76
What are the main types of investments in precious metals?
Gold coins, commemoratives, precious metals futures, precious metals mining stocks ## Footnote These investments have large carrying costs for physical storage and security.
77
What factors should clients consider when allocating investment funds to asset classes?
Expected return, risk, taxability, marketability ## Footnote Risk and return will be discussed in detail in separate chapters.
78
What is the relationship between risk and expected return for various asset classes?
Low risk and low expected returns include savings accounts and Treasury bills; high risk and high expected returns include options and collectibles ## Footnote This relationship is depicted in a risk-return trade-off figure.
79
Fill in the blank: Asset classes with __________ risk and __________ expected returns include savings accounts and Canadian-dollar-denominated time deposits.
low, low ## Footnote These assets are government insured and have high marketability.
80
What characterizes high expected returns for raw land?
Very high risk, poor marketability, inefficient pricing, high-to-very-high carrying costs ## Footnote This contrasts with low risk assets like savings accounts.
81
What are money market instruments?
Highly liquid assets with maturities of less than one year ## Footnote An example includes Treasury bills (T-bills).
82
What defines fixed income asset classes?
Instruments that offer a pre-specified, fixed cash flow at a future point ## Footnote Examples include Government of Canada bonds and corporate bonds.
83
What is a key characteristic of equity instruments compared to bonds?
Higher rate of return at the cost of higher risk ## Footnote Some equity instruments come with special privileges like rights and warrants.
84
What are derivative securities?
Securities that derive their value from an underlying financial asset ## Footnote They can be used for hedging and speculation.
85
What are the advantages of mutual funds?
Access to a diversified portfolio at a minimal cost ## Footnote The concept of diversification is discussed in the Risk chapter.
86
When allocating funds to various asset classes, what additional considerations should investors keep in mind?
Marketability, tax implications ## Footnote These factors complement risk and return.
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