IFC Exam Questions Tutorials

 C is correct because bond funds receive fixed interest payments from most of their investments, as they invest mainly in bonds and other fixed-income securities that pay a regular coupon rate. Dividend funds receive variable dividend payments from most of their investments, as they invest mainly in stocks and other equity securities that pay dividends based on the company’s earnings and policies. The return of dividend funds does not rely only on interest rates (A), but also on other factors such as stock prices, earnings growth, dividend yield, and dividend payout ratio. The return of bond funds also depends on interest rates, as well as other factors such as credit quality, maturity, duration, and yield curve. When interest rates rise, the NAVPU of both bond funds and dividend funds decreases (B), not rises, as it lowers the present value of their future cash flows. Bond fund distributions do not receive more favorable tax treatment than that of dividend funds (D), but rather less favorable, as interest income is fully taxable at the investor’s marginal tax rate while eligible dividends receive a dividend tax credit that reduces their taxable amount.

Dividends from both preferred and common shares of Canadian corporations receive preferential tax treatment because they are eligible for the dividend tax credit. This credit reduces the amount of tax payable on dividend income by accounting for the tax that the corporation has already paid on its earnings. Dividends from non-resident corporations do not qualify for this credit and are taxed at the same rate as interest income. Only 50% of capital gains, not dividend income, are subject to tax. References: The Dividend Tax Rate in Canada: What You Need to Know Now - Hardbacon, How are Dividends Taxed in Canada? Exploring the Canadian Dividend Tax Credit

A conflict of interest is a situation in which a person’s personal interests conflict with their professional duties or responsibilities. A conflict of interest should be avoided or disclosed to prevent harm to the client or the registrant. In this case, Arilla’s client, Gwen, wants to co-invest with Arilla in units of a real estate limited partnership. This is a conflict of interest because Arilla may have a personal interest in the investment that could influence her advice to Gwen or affect her ability to act in Gwen’s best interest. For example, Arilla may benefit from the investment at Gwen’s expense, or she may have access to information that Gwen does not have. Therefore, this is a conflict of interest that should be avoided by Arilla. She should decline Gwen’s offer and explain that it would compromise her professional obligations and fiduciary duty to Gwen.

Canadian Investment Funds Course, Unit 2, Section 2.3

Market risk, or systematic risk, arises from factors affecting the entire market, such as changes in inflation or interest rates, and cannot be fully eliminated through diversification. The feedback from the document states:

"Once a portfolio becomes well diversified, the only remaining risk to be concerned about is market risk. Market risk is defined as the variability of a stock or a portfolio in relation to the market as a whole. The process of diversification cancels out much firm-specific risk, so market risk is less than the total risk you would calculate if you looked at each stock separately. Market risk is also referred to as systematic risk and arises from such things as inflation, the business cycle, and interest rates."