Free Practice Questions for IFSE Institute CIFC Exam

Sachin is experiencing interest rate risk, which is the risk that changes in interest rates will affect the value of fixed income securities. When interest rates rise, bond prices fall, and vice versa. This is because investors will demand a higher yield to invest in bonds that pay a lower coupon rate than the prevailing market rate. Therefore, if the Bank of Canada makes it more expensive to borrow money, the existing bonds in Sachin’s fund will become less attractive and their prices will drop. Interest rate risk is measured by a fixed income security’s duration, with longer-term bonds having a greater price sensitivity to rate changes. Sachin can reduce his interest rate risk by diversifying his bond maturities or hedging using interest rate derivatives1.

References: Canadian Investment Funds Course, Chapter 3: Risk and Return2

Dustin needs to ensure that his recommendation is suitable for the new joint account, which may have a different risk profile than the individual accounts of Salvatore and Harriet. A joint account is an account that is owned by two or more people who share the rights and responsibilities of the account. A joint account may have different investment objectives, time horizon, risk tolerance, and financial situation than the individual accounts of the joint owners. Therefore, Dustin needs to conduct a know your client (KYC) process for the joint account and determine the appropriate risk profile for the account, based on the collective responses of Salvatore and Harriet. The risk profile of the joint account will guide Dustin in recommending suitable investment products and services that match the goals and needs of the joint owners

Thomas must contribute to CPP based on his pensionable earnings, which are his income from employment or self-employment that are subject to CPP. However, he can deduct a basic exemption amount from his pensionable earnings, which is $3,500 for the year. Therefore, his contributory earnings are:

16,000−3,500=12,500

The CPP contribution rate is 5.95% for employees and self-employed workers. Therefore, Thomas must contribute:

12,500×5.95%=743.75

References:

Canadian Investment Funds Course (CIFC) Study Guide, Chapter 6: Registered Plans, Section 6.3: Canada Pension Plan (CPP), page 6-101

Canada Pension Plan - How much could you receive - Canada.ca2

According to the Canadian Investment Funds Course, capital gains distributions are the portion of the mutual fund trust’s net realized capital gains that are paid out to the unitholders. Capital gains distributions are not the same as capital gains from selling or redeeming units of the mutual fund trust, which are reported on a T5008 slip. Capital gains distributions are taxable in the year they are received, even if they are reinvested in additional units of the fund. The mutual fund trust will issue a T3 slip to report the amount and type of income that is allocated to each unitholder, including capital gains distributions. The unitholder must report this income on their tax return and pay tax on 50% of the capital gains distributions at their marginal tax rate.

References: 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 9: Retirement)

The purpose of holding money market instruments for non-money market mutual funds is to provide liquidity for the fund. If the portfolio manager has an immediate need for cash, such as to pay expenses or meet redemption requests, money market instruments are relatively easy to liquidate because they have short maturities and low credit risk. Money market instruments do not primarily generate investment income that provides investors with preferential tax treatment, as interest income from money market instruments is fully taxable at the investor’s marginal tax rate. Money market instruments are not purchased by non-money market funds to satisfy the regulatory requirement of fund diversification, as there is no such requirement for mutual funds. Money market instruments do not ensure that the fair market value of a mutual fund will not drop below a minimal market value, as money market instruments can also fluctuate in value depending on interest rate changes and supply and demand factors. References: Money Market Instruments

 Daisy could seek permission from her dealer to request a client mobility exemption with the Alberta Securities Commission. This exemption allows a registered individual in one jurisdiction to service a client who moves to another jurisdiction, without having to register in the new jurisdiction, subject to certain conditions. Some of these conditions are that the individual must be registered with a dealer that is registered in both jurisdictions, the individual must not have more than five clients in the new jurisdiction, and the individual must notify the regulator in the new jurisdiction of the exemption. References: Client Mobility Exemption

According to the Canadian Investment Funds Course, a registered retirement income fund (RRIF) is a type of registered plan that provides a stream of income in retirement. A RRIF can be opened at any age, but it must be established by the end of the year the annuitant turns 71. A RRIF cannot accept any contributions, but it can receive transfers from other registered plans, such as RRSPs, PRPPs, RPPs, or other RRIFs. A RRIF has no maximum withdrawal limit, meaning that the annuitant can withdraw any amount from the plan at any time. However, a RRIF has a minimum withdrawal requirement, which is calculated based on the annuitant’s age or the age of their spouse or common-law partner. The minimum withdrawal must be paid out in the year following the year the RRIF is opened and every year thereafter. The minimum withdrawal is taxable as income in the year of receipt.

Therefore, the correct answer is C. Gregory’s account will be subjected to no maximum withdrawal limit but to an annual minimum withdrawal.

References: 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 9: Retirement)

By asking Brad about his financial obligations and assets, you are trying to gather information about his net worth, which is one of the essential facts that you need to know about your client according to the KYC rule. Net worth is the difference between the total value of a client’s assets and the total value of their liabilities. It reflects the client’s financial position and helps you assess their risk tolerance, investment objectives, and suitability for different products and services.

References = Canadian Investment Funds Course (CIFC) - Module 1: The Financial Services Industry - Section 1.3: Know Your Client (KYC)1 and web search results from search_web(query="know your client rule")23

1: https://www.ifse.ca/wp-content/uploads/2021/08/CIFC-Module-1.pdf

The category of Know Your Client (KYC) information that has been given is investment experience. Investment experience refers to the level of knowledge and familiarity that a client has with various types of investments, such as mutual funds, stocks, bonds, etc. It also includes the client’s past performance, frequency of trading, and length of holding period. In this case, Felipe has given information about his investment experience by stating that he purchased a mutual fund with a deferred sales charge, that he had a 25-year growth objective, that he never noticed his mutual fund having a drop in value, and that he never made any changes to his investment.

References = Know Your Client (KYC): What It Means, Compliance Requirements, Know Your Client (KYC) - Overview, Importance and Benefits, Process, IFSE CIFC Module 2: The Investment Industry, page 2-14.

A mutual fund corporation is a type of mutual fund structure that is organized as a corporation and issues different classes of shares to investors. A mutual fund corporation has the ability to allocate its income and expenses among the different classes of shares, and to distribute any income received by the corporation in the form of either capital gains or Canadian dividends. These types of distributions are taxed at lower rates than interest or foreign income, which may reduce the tax liability of the investors. A mutual fund corporation can also use capital losses to offset capital gains, and carry them forward or back to reduce taxable income in other years.

References = Canadian Investment Funds Course, Unit 6: Mutual Funds, Lesson 2: Mutual Fund Structures, Section 6.2.2: Mutual Fund Corporations1; CIFC prepkit, Chapter 6: Mutual Funds, Question 6.2.2 2