Free Practice Questions for CISI IFC Exam

Mutual fund orders placed after the market closes are processed using the next business day's net asset value per unit (NAVPU). Since Derek submitted his sell order at 8:00 p.m. EST on Friday, January 6 (after the close of the markets), his proceeds will be based on the NAVPU for Monday, January 9, the next business day.

Comprehensive and Detailed Explanation From Exact Extract:

Sector rotation is an investment philosophy that prioritizes weighting industries based on their expected performance during different economic cycles, placing less emphasis on individual security selection. The feedback from the document states:

"Sector rotation is a portfolio manager’s attempt to profit through timing. It is based on the belief that different industries will perform well during certain stages of the economic cycle. Industries expected to outperform would be overweighted. More emphasis is placed on industry weighting than on security selection."

Index mutual funds and traditional exchange-traded funds (ETFs) are both types of investment funds that use a passive investment management style, which means they try to track the performance of a specific market index, such as the S&P/TSX Composite Index or the S&P 500 Index. They do so by holding the same securities as the index or a representative sample of them, and by adjusting their portfolio composition and weighting to reflect any changes in the index. However, both types of funds may not be able to exactly replicate the return of the index for various reasons, such as fees, expenses, tracking error, rebalancing frequency, dividend reinvestment, and cash holdings. Therefore, there may be some deviation or difference between the fund’s return and the index’s return, which is called tracking difference.

Comprehensive and Detailed Explanation From Exact Extract:

Liquid alternative funds (liquid alts) are designed to offer more flexibility in using short sales, leverage, and derivatives compared to traditional mutual funds, but with less freedom than hedge funds. The feedback from the document states:

"Liquid alts, also known as alternative mutual funds, were recently introduced into Canada, and are allowed greater use of short sales, leverage, and derivatives compared to regular mutual funds, but not to the same extent as hedge funds."

According to the Canadian Investment Funds Course, inflation is the general increase in the prices of goods and services over time. Inflation reduces the purchasing power of money, meaning that a dollar can buy less in the future than it can today. Inflation also affects the returns of fixed income investments, such as bonds, which pay a fixed amount of interest and principal. If inflation is higher than expected, the real rate of return (the nominal rate minus inflation) of a bond will be lower than anticipated.

In this case, Pippa purchased a 15-year bond with a 7% coupon rate at the time of issuance. The bond is due to mature later this year. The general interest rate climate remained stable for the first 13 years of the bond’s term. However, especially over the past 18 months, both inflation and general interest rates have increased more than expected. This means that Pippa will receive less purchasing power from her bond’s interest and principal payments than she expected when she bought the bond. She will not experience a capital loss, as she will receive the full face value of $5,000 at maturity. She will also not benefit from a higher real rate of return, as inflation erodes the value of her fixed payments. She will not receive any capital appreciation, as the bond’s price does not change once it is held to maturity.

Therefore, the correct answer is C. The return of investment capital will have lower purchasing power than prior to investing.

Comprehensive and Detailed Explanation From Exact Extract:

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."

Comprehensive and Detailed Explanation From Exact Extract:

Financial circumstances are a critical component of the Know Your Client (KYC) process, as they determine the client’s ability to commit savings to investments and the level of risk they can assume. Mortgage documents provide insights into the client’s debt and obligations, which are essential for assessing financial circumstances. The feedback from the document states:

"Financial circumstances are an important consideration in judging the suitability of investments, because they determine the amount of savings clients can commit to investing and the level of risk they can assume. Marc’s client’s mortgage document will give Marc valuable insights into the level of debt and mortgage obligations his client has, helping in evaluating the client’s financial circumstances."

Comprehensive and Detailed Explanation From Exact Extract:

Discussing a client’s household budget is part of identifying their financial situation and constraints, a key step in the financial planning process. The feedback from the document states:

"The household budget is part of the discussions related to identifying financial problems and constraints."

The investment objective for the $10,000 currently sitting in Lucas’s RRSP is safety of principal, which means that he wants to preserve the value of his investment and avoid any loss of capital. Safety of principal is a suitable objective for Lucas because he plans to withdraw the money in two months for the LLP, which is a very short time horizon. He does not need to generate any income or growth from his investment, as he will use the money to pay for his education expenses. He also does not need to worry about tax-deferral, as the LLP allows him to withdraw money from his RRSP without paying any tax, as long as he meets the eligibility and repayment requirements1. Therefore, Lucas should invest his money in low-risk and liquid assets, such as money market securities or guaranteed investment certificates (GICs), that will protect his principal and ensure that he can access his funds when he needs them. References:

Canadian Investment Funds Course (CIFC) Study Guide, Chapter 6: Registered Plans, Section 6.4: Lifelong Learning Plan (LLP), page 6-132

Lifelong Learning Plan (LLP) - Canada.ca1

Beta is a relative measure that compares how an investment reacts to movements in a specific index. A beta of 1 means that the investment moves in sync with the index. A beta greater than 1 means that the investment is more volatile than the index. A beta less than 1 means that the investment is less volatile than the index.